Allergan: Europe Halts Esmya Prescriptions Due To Liver Risk

Allergan CEO Brent Saunders. Source: Business Insider

Earlier this month the European Medicines Agency (“EMA”) advised that no new patients take Esmya while the agency reviews the drug for possible links to liver injury:

The European Medicines Agency started a review of Esmya (ulipristal acetate) for uterine fibroids in December following reports of four cases of serious liver injury after its use, leading to liver transplants in three of the cases.

Temporary safety measures have now been introduced advising that no new treatment courses with the drug should be initiated while the review is ongoing, and that those already taking it have blood tests to monitor their liver function at least once a month.

If the test shows liver enzyme levels more than twice the normal limit then EMA advises healthcare professionals to stop treatment and closely monitor the patient. Esmya (ulipristal acetate) is used to treat symptoms of uterine fibroids – non-cancerous tumours of the womb. It was first approved in the EU in 2012. Allergan (AGN) markets the drug under the name Fibristal in Canada and Gedeon Richter (GEDRY) markets it in Europe.

The Situation

Allergan has a new drug application (“NDA”) for ulipristal acetate that was accepted by the FDA in Q3 2017. An approval could give Allergan the first oral treatment for uterine fibroids in the U.S. However, I believe the EMA review could potentially have a negative impact on that NDA. If the EMA is studying a potential link between Esmya and severe liver injury then it could behoove the FDA to take that study seriously. It could also be beneficial to leverage the EMA’s research or at least await the outcome before granting FDA approval to Allergan.

In my opinion, it could be a public relations nightmare for the FDA to (1) grant FDA approval for Esmya prior to the EMA completing its study on the potential link to liver injury and (2) later discover out-sized occurrences between Esmya and liver injury in U.S. patients. Allergan does not foresee the European investigation hurting its chances of receiving FDA approval:

But the company, for its part, doesn’t foresee the ongoing European investigation affecting its chances at the FDA. “We do not believe there is a causal relationship between Esmya and liver transplantation,” a spokesman said in December, pointing out that no cases of liver transplantation cropped up in any of the controlled clinical trials for Esmya in the EU, Canada or the U.S.

Nonetheless, if FDA approval is delayed it could hurt sentiment for AGN. The company is known for its vaunted R&D pipeline. However, according to SA author The Value Investor, outside of Esmya the company’s other drug launches might not see approval until 2019/2020:

While 6 of the company’s “stars” advanced to Phase III in the past year, it must be said that 12 launches were delivered upon in 2017; but that is not enough to drive sustainable revenue growth apparently. While ESMYA is anticipated to see approval this year, most other launches (if approval comes in) are not seen before 2019/2020.

Meanwhile, Allergan is facing a loss of exclusivity (“LOE”) for key products. It lost a patent battle for dry-eye drug Restasis in Q4 2017. After an inter-partes review (“IPR”) is concluded generic Restasis could arrive in Q2 2018. Mylan and Teva (TEVA) recently launched a generic version of Allergan’s vaginal cream Estrace. It will likely punish Estrace’s $102 million in quarterly revenue in Q1 2018. Estrace and Restasis represent about 11% of Allergan’s total revenue and an estimated 14% of its income. A real time loss of revenue amid a barren R&D pipeline could cause even the staunchest AGN bulls to become dismayed.

Allergan’s Valuation Could Come Under Scrutiny

In the past Allergan has grown through acquisition. Since organic growth has been practically nil I believe the company’s growth is dead. The argument with bulls is over the proper way to value the company. I value the company as a multiple of run-rate EBITDA. However, analysts and AGN bulls have put a lot of weight on Allergan’s pipeline. That could change going forward.

Like I mentioned earlier, outside Esmya new drug approvals may not materialize until 2019 or 2020. Secondly, the company has been cutting R&D even as revenue has increased. The company’s Q4 2017 revenue of $4.3 billion was 17% higher than its revenue in Q2 2016. However, R&D expense was 14% lower. R&D as a percentage of revenue was 9% in Q4 2017 versus 17% in Q2 2016.

The company took a scalpel to R&D in Q2 2017 and continue to cut it as it suffered a Restasis patent loss in Q4 2017, despite the fact revenue was rising. I believe cutting R&D and operating expenses was the right thing to do amid LOE. It allowed the company to grow EBITDA and keep debt/run-rate EBITDA at around 4.0x. However, it could be difficult to call Allergan a growth company with its R&D as a percentage of revenue at 9%. Equity analysts might also pump the brakes on giving Allergan credit for its prodigious pipeline. AGN is off over 30% since management sold its Restasis patents to the St. Regis Mohawk Tribe. Nonetheless, equity analysts still issued buy ratings on the stock. If analysts abandon AGN due to a lack of hits from its R&D pipeline then AGN could fall even further.


The EMA’s decision to halt new prescriptions for Esmya could stymie Allergan’s FDA approval for Esmya in the U.S. Another hit to Allergan’s R&D pipeline could call into question its ability to develop new drugs amid LOE. Going forward I believe investors could question whether AGN is really worth 10x run-rate EBITDA. I believe a lack of price discovery or a decision by analysts to no longer vehemently defend the stock are major risks. AGN remains a sell.


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