Mallinckrodt (MNK) is off over 25% since it reported Q3 results reflecting a total revenue decline of 11% Y/Y, and a decline in Acthar of 6%. In September 2017 the The Journal of the American Medical Association (“JAMA”) questioned the effectiveness of Mallinckrodt’s Acthar for certain indications. This might have the been a major clue that Acthar could face headwinds:
Over the past five years, why has the US government spent $1 billion on a drug that is no more effective than alternatives that are tens of thousands of dollars cheaper per treatment?
The drug is called Acthar, and for the past year it has been the focus of a study by the Oregon Health and Science University School of Medicine and Oregon State that has been trying to understand why doctors keep prescribing it for ailments it has never been proved to treat effectively.
JAMA claimed there was a lack of quality evidence supporting Achar’s effectiveness for certain conditions other than infantile spasms. Secondly, Medicare Part D spent $500 million on Acthar in 2015. Medicare Part D is a program for the elderly, yet Acthar is indicated for infants. Lastly, the surge in government spending was partly driven by prescriptions from a relatively small group of doctors. Given that the report came from a respected medical journal, I felt it was particularly damning and could have been the final straw for Mallinckrodt.
Acthar Has Been Under Siege For Years …
Acthar had been under siege for years. Mallinckrodt came on my radar in Q4 2015 after Citron questioned whether Acthar, which represents 39% of Mallinckrodt’s total revenue, was effective for certain indications. Management promised to provide studies to prove Acthar’s effectiveness, yet JAMA intimates that for certain indications, there are alternatives much cheaper than Acthar.
In June 2017 Citron suggested pharmacy benefit manager Express Scripts (ESRX) was in an alliance with Mallinkrodt to convince health insurers and employers to pay exorbitant prices for Acthar even for ailments it was not indicated for. Short seller Jim Chanos likened the relationship between Mallinckrodt and Express Scripts to Valeant (VRX) and former specialty pharma Philidor. Ironically, in Q4 2015 CVS (CVS) and Express Scripts dropped Philidor from their networks, citing Philidor’s “noncompliance” with its provider agreement. Valeant later cut ties with embattled Philidor.
… Now Acthar Appears To Have Cracked
Revenue from Acthar had previously been growing by double-digits. Now it appears to have cracked. Its Q3 revenue of $309 million was off 6% Y/Y, while Mallinckrodt’s total revenue fell 11%. EBITDA only fell by 8% as the company reduced SG&A and R&D as a percentage of sales to offset the top line erosion.
The following developments appear to be negatively impacting Acthar:
Acthar’s Use For Other Indications Could Be In Decline
During Mallinckrodt’s Q3 earnings call a question was raised about the fulfillment rates for Acthar prescriptions. Below was management’s response:
The payer environment has become increasingly complex for specialty drugs. Acthar has never been immune to these pressures, but as the third quarter progressed, we saw an increasing number of prescriptions going unfilled beyond the level we had seen previously … we anticipate it will take time to work through the situation, and we expect fourth quarter 2017 Acthar net sales to be down sequentially.
Apparently the spike occurred across multiple distribution channels. It could be difficult to pinpoint if Acthar is receiving strong headwinds among commercial payers, Medicare or both. Days after the earnings report market chatter suggested a large payer had started putting formulary restrictions on Acthar:
The restrictions were applied suddenly to high volume Acthar users — users that started using the drug for pulmonary, rheumatological, neurological and nephrological illnesses after the drug was approved for those indications in 2015.
Unlike patients who use the drug for its main indication, infantile spasms, these users were getting 90-day prescriptions for the drug. Now they’re getting 30-day prescriptions and patient churn is increasing. This is occurring even among patients who use commercial insurers that have deals with Mallinckrodt.
I expected such restrictions to have occurred years ago. It appears they are now materializing and the impact could potentially be felt by Mallinckrodt into 2018.
Express Scripts Is Cutting Back On Prescriptions
Per Business Insider the nature of Mallinckrodt’s relationship with Express Scripts, the nations largest benefit pharmacy manager, might also have changed. Express Scripts is now recommending that its clients also place restrictions on Acthar:
“As a PBM, Express Scripts has always offered clients utilization management restrictions,” said spokesperson Jennifer Luddy. “Coverage is a client’s decision, but for Acthar Gel we recommend clients implement prior authorization criteria that only approves the drug for treating infantile spasms, or for patients who are unable to tolerate steroids for an acute MS exacerbation, for up to a 30-day supply.”
Of course, “There are clients who choose not to implement this rule,” she added. She could not tell if, all of the sudden, patients had decided to implement this recommended prior authorization.
If insurers place restrictions on the amount they purchase and indications for which Acthar is used, Acthar sales could fall further. Such actions could also hamper Mallinckrodt’s ability to maintain pricing power. Using Valeant as an example, Philidor was key in getting doctors to have prescriptions filled for its dermatology products and products that had come off patent.
Jublia, Valeant’s treatment for toe nail fungus, was particularly dependent upon Philidor. It generated sales of $106 million (4% of total Valeant sales) in Q3 2015, 44% of which was distributed through Philidor. With Philidor no longer around, Jublia sales were $39 million in Q3 2016 and $19 million in Q3 2017. The decline from Q3 2015 to Q3 2017 was over 80%.
Philidor was also instrumental in keeping prices high for Valeant’s drugs despite a loss of exclusivity. So far the hit to Acthar appears to have been volume-driven. A loss of Express Scripts’ distribution prowess could also trigger a loss of pricing power for Acthar. That said, Acthar sales through Express Scripts to be a point a contention in Q4.
Acthar’s sales appear to have cracked. Customers and distributors of the drug could be taking heed from JAMA’s criticms as well as observations of short sellers. MNK remains a sell.
Trump And The Global Economy
The second installment of Trump And The Global Economy Town Hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Wuyi Jacobs (AfroBeats Radio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead.
The event was well-received by the community. We parsed through President Trump’s proposed tax plan and [i] how it was pure economic folly and [ii] high net worth individuals could potentially game the system by shifting income around. Apparently, Kansas Coach Bill Self did this when the state of Kansas cut taxes in the past. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership vis-a-vis Obama? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?