Generic Restasis Risk Metastasizes To Shire

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Shire CEO Fleming Ornskov

Earlier this week Judge William Bryson ruled Allergan’s (AGN) Restasis patents were invalid, and expressed serious concerns about Allergan’s decision to transfer the patents to the St. Regis Mohawk Tribe. Restasis controls about 70% of the $1.8 billion U.S. dry eye market. Shire’s (SHPG) Xiidra controls another 20%. The patent loss could soon make generic Restasis a reality. That risk appears to have metastasized to Shire whose shares were off over 3% mid-day Wednesday:

The RESTASIS patent invalidation-stoked selling in Allergan (AGN -4.7%) has spread to Shire plc (SHPG -3.6%) as investors perceive generic encroachment on its Xiidra (lifitegrast ophthalmic solution) franchise.

The selling appears overdone considering that Shire’s ophthalmology franchise accounted for only ~2% of Q2 product sales ($57.4M/2,375.1M).

Allergan also faces an inter partes review (IPR) of the patents. It expected to use the Mohawks’ sovereign immunity to dismiss the IPR. Senator Claire McCaskill recently drafted a bill disallowing tribal sovereign immunity to be used to block U.S. Patent and Trademark Office review of patents. If Allergan loses the IPR then it likely clears a path for generic Restasis.

Potential Impact On Xiidra

The question remains, when could generic Restasis come to market? Generics rivals would have to win the IPR and generic Restasis would then need FDA approval. According to Barron’s some analysts believe generic Restasis could arrive as early as 2018:

Some analysts say a generic version of Restasis could arrive next year. Others, like UBS’s Marc Goodman insist it will have to wait until 2019 since no generic drug maker will want to risk a launch until after Allergan’s appeal is decided.

The Barron’s article might have been the catalyst to send SHPG and AGN lower (AGN was off nearly 5% mid-day). Generic Restasis would likely cause Restasis prices to fall much lower. According to the IMS Institute For Healthcare Informatics, from 2002 to 2014 the price of medicines was reduced by 51% in the first year generics entered the market. According to Shire’s Director and Head, Global Communications for Ophthalmics & Neuroscience, Xiidra is the first prescription medicine in the U.S. approved to treat both the signs and symptoms of dry eye.

We priced Xiidra® (lifitegrast ophthalmic solution) 5% competitively and in consideration of the innovation and value, it delivers to help address unmet patient needs, as it is the first prescription medicine in the U.S. approved to treat both the signs and symptoms of dry eye disease.

Whether Xiidra’s efficacy in dry eye can allow it to maintain premium prices amid generic Restasis remains to be seen. There could be a scenario where [i] Xiidra maintains its premium pricing and [ii] generic Restasis expands the dry eye market by making the treatment more affordable. However, there could be knock-on effects for Xiidra; its pricing or its ability to continue to take share from Restasis could be negatively impacted. At least that’s what the market appears to be telling us.

Potential Impact On Shire

Shire specializes in treatments for rare diseases and high patient-impact medicines. In Q2 2017 it had product sales of $3.6 billion, up 55% Y/Y. Revenue growth was buoyed by its $32 billion merger with Baxalta in 2016. On a pro forma basis its product sales grew 7% Y/Y, and were pretty well-distributed: [i] 27% was derived from hematology, [ii] 20% from genetic diseases, [iii] 19% from neuroscience and 13% from internal medicine. Only 2% came Xiidra ($57 million) which was included in the ophthalmology segment.

Xiidra was launched in the second half of 2016 and has rapidly grown its market share. Q2 2017 revenue of $57 million was up 46% sequentially. The drug will likely continue its rapid growth as it offers another alternative to dry eye patients. If generic Restasis were to stunt Xiidra’s growth it could remove a potential catalyst for Shire. However, as of now, its contribution to revenue does not appear to be that meaningful.

Conclusion

Fears of generic Restasis impacting Shire’s’ bottom line appear to be overblown. SHPG is down 28% Y/Y. I rate the stock a hold until investors can gain more visibility on its revenue growth post-merger and its progress on cost synergies.

 

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