AGN: Balance of Power Between AGN and Formulary Managers

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Richard Evans / Scott Hinds / Ryan Baum / Hardy Evans

203.901.1631 /.1632 / .1627

revans@ / shinds@ / rbaum /


April 13, 2016

AGN: Balance of Power Between AGN and Formulary Managers

  • As formulary managers turn their attention to spec pharma companies’ aggressive pricing and claims-submission practices, AGN inevitably comes under scrutiny, alongside others (e.g. VRX, HZNP, ENDP, MNK)
  • If payors drive the prices of AGN products down to the levels of feasible substitutes, we estimate AGN’s global sales would fall by as much as 12% – more than the amount we estimate for MNK (10%), on par with our estimate for ENDP (12%), and less than our estimates for VRX and HZNP (17% and 68%, respectively)
  • This having been said, we believe the pressure applied by payors to AGN will be less than that applied to its spec pharma peers – particularly VRX, HZNP, and ENDP. This is because AGN’s rate of net price inflation is much less rapid than that seen at VRX, HZNP and MNK; the gap between AGN prices and the prices of substitutes is much smaller than at VRX, HZNP and MNK; the percent of the AGN US Rx product line that is substitutable is less than at VRX, HZNP and ENDP; and, unlike VRX, HZNP and ENDP, AGN has not used aggressive tactics to circumvent payors’ formularies

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. AMGN, BMY, GILD, SHPG, VRTX); Biopharma companies with pending major product approvals (e.g. ABBV, ACAD, ADMA, ALIOF, BIIB, CHMA, CLVS, CPRX, CTIC, GILD, ICPT, JAZZ, LLY, LPCN, MRK, NVO, OCUL, PTCT, SRPT, TEVA, ZSPH); SNY on sales potential for Praluent (alirocumab); CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WBA, CVS); Research Tools & Services companies as growth expectations and valuations are too high in an environment of falling biopharma R&D spend (e.g. CRL, Q, ICLR); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE)

Until PFE’s bid, like other specialty pharmaceutical companies (e.g. VRX, HZNP, ENDP) AGN was a tax-inverted serial acquirer with relatively aggressive US pricing, and it stands to reason that PFE’s bid may have shielded AGN shares from the selling pressure that fell on its spec pharma peers. Now that the merger is off it’s worth examining AGN’s fundamentals using the same lens we’ve applied to VRX, HZNP, ENDP and MNK[1]

Until mid-2014 AGN’s pro-forma real net US Rx sales growth was driven more by volume than price; however, volumes have recently turned negative (Exhibit 1a). The Namenda loss of exclusivity (LOE) entirely explains the negative volume trend; if Namenda is backed out, volumes are roughly flat (Exhibit 1b)

On a cumulative basis including Namenda, the US net Rx sales picture is one of strong net pricing gains offsetting negative volume and weak mix (Exhibit 2a). Backing out the Namenda LOE, net sales growth is almost entirely explained by net pricing growth[2], with relatively little mix impact (Exhibit 2b). Major positive and negative contributors to net US Rx sales growth, by quarter since 1Q08, are provided as Appendix 1

Our thesis as it relates to AGN’s spec pharma peers, particularly VRX, HZNP, and ENDP, is that payors are now focused on these companies’ pricing and claims-submission practices – and, that this will result in an effort to drive prices for these companies’ products down toward the prices of feasible substitutes

The first step to analyzing the potential impact is to analyze the substitutability of AGN’s US Rx product line as we’ve done for other spec pharma manufacturers, sorting all products into one of three categories:

  1. A-rated substitutes are available (pharmacists can substitute a generic alternative for the company’s product unless the Rx is designated ‘dispense as written’)
  2. Therapeutic substitutes are available (a different dose, formulation, or molecule is available and is an accepted treatment for the same condition the company’s product is typically written to treat); or
  3. No substitutes are available for the company’s product

Results are provided in Exhibit 3, and an explanation of each product’s category placement is provided as Appendix 2. If we apply our definition of therapeutic substitution strictly (a different dose, formulation, or molecule is available and is an accepted treatment for the same condition), we would consider each of Namenda XR, Bystolic, and Lumigan to be substitutable – as indicated in Exhibit 3. However, each of these brands has meaningful advantages over the available substitutes, and on most formularies these advantages should support these brands’ premium prices relative to alternatives. Namenda XR is once-daily, as compared to Namenda (now generically available) which is dosed twice daily. Given the utility of once-daily dosing in Alzheimer’s patients, we believe Namenda XR can hold a reasonable unit share of the broader (memantine) molecule market at or near its current net price. Bystolic is the only available form of nebivolol, and is in theory substitutable by one of the many other beta-blockers that are generically available. However, on a practical level Bystolic is more cardio-selective than alternatives, which potentially makes Bystolic more tolerable. And, Bystolic benefits from positive outcomes data (SENIORS trial) in older patients with hypertension and a history of heart failure. Finally, Lumigan is the only 0.01% concentration form of ophthalmic (for glaucoma) bimatoprost. Generic forms are available at the 0.03% concentration; however, this higher concentration is less tolerable, as evidenced by the fact that nearly 93 percent of bimatoprost prescriptions are written for the branded 0.01% concentration (Exhibit 4). Our sense is that Namenda XR, Bystolic, and Lumigan will behave as though they are non-substitutable; however, we’ve chosen to show the analysis both ways

If we consider Namenda XR, Bystolic, and Lumigan to be therapeutically substitutable, then AGN’s US Rx net sales fall into our three categories as follows: 7.6% of sales are to products with A-rated alternatives, 57% are to products with therapeutic substitutes, and 36% are to products with no substitutes. Conversely if we consider Namenda XR, Bystolic, and Lumigan as non-substitutable, these percentages change to 7.6% A-rated, 39% substitutable, and 54% non-substitutable (Exhibit 5)

The second step is to determine how far the prices of substitutable products might fall. For all AGN products with A-rated or therapeutic substitutes, we calculated the difference between the net price of the AGN product, and the net price of the substitute. We then calculated the change in AGN’s net sales that would occur if all AGN products with A-rated or therapeutic substitutes were repriced to the level of the substitutes

If Namenda XR, Bystolic, and Lumigan are categorized as substitutable, then repricing of all AGN A-rated and substitutable products to the levels of their substitutes would reduce US Rx net sales by 40%, and global net sales by 22% (Exhibit 6). Conversely if we consider these same three brands as non-substitutable, repricing AGN products to the level of substitutes would lower US Rx net sales by 24%, and global net sales by 12% (Exhibit 7)

Because we believe Namenda XR, Bystolic, and Lumigan will behave as non-substitutable products, we view 12% as the correct global sales at risk figure for AGN. This is plainly a significant level of absolute risk; however, as compared to the other specialty pharma companies, we see AGN carrying substantially less relative risk. AGN’s global sales at risk is on par with ENDP and MNK, but substantially less than VRX, and dramatically less than HZNP (Exhibit 8). The average price gap between an AGN product and its substitutes is on par with the value for ENDP, but one-third or less the values for VRX, HZNP, and MNK (Exhibit 9). The percent of US Rx net sales that are substitutable is less than for ENDP, HZNP, and VRX, but greater than MNK (Exhibit 10). And finally AGN’s rates of list (Exhibit 11) and net (Exhibit 12) pricing growth are on par with ENDP’s, but well below rates for VRX, HZNP, and MNK. Considered in the aggregate, AGN’s product portfolio is less substitutable, priced closer to the level of substitutes, and has inflated much less rapidly than its average peer. And, unlike VRX, HZNP and ENDP, AGN has not used specialty pharmacies as a means of circumventing formulary restrictions


  1. See: “While Gulliver Slept: The Rapid Pace & Fragile Pre-Conditions of VRX’s US Pricing Power”, SSR Health LLC, October 14, 2015; “VRX: Belt & Braces Analysis of US Rx Price / Volume. Price Still Wins”, SSR Health LLC, October 22, 2015; “Balance of Power Between VRX & Formulary Managers – An Empiric Framing”, SSR Health LLC, January 5, 2016; “HZNP / MNK: The Balance of Power Between HZNP / MNK & Formulary Managers”, SSR Health LLC, January 12, 2016; and “VRX, ENDP, HZNP, & MNK – A Comparison of US Pricing Risks”, SSR Health LLC, March 28, 2016
  2. The values in Exhibits 2a and 2b are contributions to nominal, pro forma net US Rx sales growth for the period specified on the x-axis. Using Exhibit 2a, ‘LTM’ as an example, net pricing gains contributed $168M to US net sales growth for the period, and this contribution is equivalent to 352% of total reported net sales growth.

©2016, SSR, LLC, 1055 Washington Blvd, Stamford, CT 06901. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. In the past 12 months, through a wholly-owned subsidiary SSR Health LLC has provided paid advisory services to Pfizer Inc (PFE) and to Merck KgAA (MKGAY) on both securities-related and non-securities-related topics

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