HZNP / MNK: The Balance of Power Between HZNP / MNK and Formulary Managers

Richard
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Richard Evans / Scott Hinds / Ryan Baum / Hardy Evans

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January 12, 2016

HZNP / MNK: The Balance of Power Between HZNP / MNK and Formulary Managers

  • There are no generic equivalents to or close therapeutic substitutes[1] for 77% of MNK’s US Rx net sales; by comparison only 22% of HZNP’s (or 23% of VRX’s) [2] US Rx net sales cannot be substituted
  • As compared to HZNP (or VRX), MNK has the additional advantage of its products falling across both the inpatient and retail settings. Because hospital and retail formularies tend to be managed by distinct formulary managers, MNK ‘appears smaller’ to either type of formulary manager; and, neither type of formulary manager is a credible threat to MNK products that fall outside its scope of influence. In contrast, HZNP and VRX have retail-predominant product lines that are highly interchangeable with other less expensive alternatives
  • HZNP and VRX were able to win reimbursement for their interchangeable products by using specialty pharmacies to exploit formulary managers’ appeals processes on a patient-by-patient basis; and, we believe formulary managers will reduce these payments by NDC-locking the corresponding products, or will threaten to do so as a means of securing price concessions
  • MNK also makes use of specialty pharmacy, especially for Acthar. However in Acthar’s case reimbursement has been won by positioning the product as a final option for patients who have failed all or most alternatives – rather than by exploiting payors’ appeals processes to get Acthar reimbursed in patients where other products are more suitable
  • HZNP and VRX are very unlikely to escape formulary pressure on their substitutable products; in contrast whether MNK can continue to make the (admittedly aggressive) case for Acthar re-imbursement in patients that have failed other options remains an open question

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 undervalued basal insulin franchise and sales potential for Praluent (alirocumab), in addition to its undervalued pipeline; CFN, BCR, CNMD and TFX on rising hospital patient volumes; XRAY and PDCO on rising dental patient volumes and rising average dollar values of dental products and services consumed per visit; 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)

The balance of power between an Rx manufacturer and formulary managers is largely determined by whether, and to what degree, the manufacturer’s products can be substituted by the formulary manager. To gain an objective handle on formulary managers’ potential leverage over HZNP and MNK, we sorted each of the companies’ US Rx products into one of three categories:

  1. A-rated[3] substitutes are available (pharmacists can substitute a generic alternative for the HZNP or MNK 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 HZNP or MNK product is typically written to treat); or
  3. No substitutes are available for the HZNP / MNK product

For HZNP, 2.6% of US Rx net sales are in category 1 (A-rated subs), 75.3% in category 2 (therapeutic subs), and 22.1% in category 3 (no subs, Exhibit 1). Where substitutes are available, HZNP products have prices that are on average 43-fold higher than the substitutes (Exhibit 2). Notes explaining our views on each HZNP product’s substitutability are in Appendix 1

For MNK, 5.4% of US Rx net sales are in category 1, 17.6% in category 2, and 77% in category 3 (Exhibit 3). Where generic substitutes are available, MNK products have prices that are on average almost 37-fold higher than the substitutes; where branded substitutes are available the MNK product is on average 15% more expensive (Exhibit 4). Notes explaining our views on each MNK product’s substitutability are in Appendix 2

Based on the degrees to which the companies’ products are substitutable, it’s immediately clear that MNK is in a stronger position vis-a-vis formulary managers than HZNP (or VRX)[4]

MNK

Starting with MNK, only 5.4% of US Rx net sales are category 1 / A-rated; this limits the potential impact of straightforward NDC lock-outs[5]. 17.6% of US Rx net sales are in category 2 / therapeutically substitutable; however most of these sales fall into two brands: Ofirmev (13.2%) and Recothrom (3.3%). Ofirmev is the only approved injectable acetaminophen, and while it’s possible in many patients to use generic oral acetaminophen, the injectable form does have distinct advantages in patients who may be difficult to dose orally. Recothrom (recombinant human thrombin) can be substituted by purified human thrombin (Evithrom, JNJ); however, there are at the very least some appealing theoretical advantages to using recombinant thrombin rather than the purified form, and Recothrom is priced at roughly parity or a slight discount to Evithrom (Exhibit 4, again)

Unlike VRX and HZNP, on a sales-weighted basis MNK’s products generally are not priced at very large premiums to the alternatives. Ofirmev is plainly more expensive than other non-narcotic injectable pain meds (e.g. generic ketorolac) and oral acetaminophen, however there’s arguably no easy substitute for Ofirmev in an NPO[6] patient where acetaminophen is the preferred analgesic – so we can arguably ignore the Ofirmev price premium in Exhibit 4. This leaves large percentage premia only for MNK’s seven smallest products, which account for less than 3% of net sales

It should also be kept in mind that MNK’s products fall across both the inpatient and retail settings – meaning that with the small exception of integrated systems there will generally be two distinct formulary managers (the hospital formulary for inpatient, and the PBM or HMO formulary for retail) that care about MNK’s prices. For example a PBM looking for leverage over Acthar doesn’t pose any threat to Ofirmev, Recothrom, or Gablofen, since these are all hospital products that generally fall beyond the PBM’s scope of control

In the case of hospital formularies MNK has fairly significant pricing freedom on Inomax and Uvadex, but has to keep both Ofirmev and Recothrom pricing within reason, to avoid severe restrictions on the former and to avoid having the latter substituted by Evithrom. In the case of PBMs and HMOs, MNK’s strategy has been largely about finding as many niche indications as possible in which Acthar can be positioned – and thus reimbursed – as the last remaining treatment option for patients that have failed all or most alternatives

HZNP

Like MNK, very little (2.6%) of HZNP’s US Rx net sales are category 1 (A-rated substitutes)

However unlike MNK, HZNP’s products fall almost completely into the retail category, meaning traditional formulary managers (PBMs, HMOs) can influence the entire product line. And, where only 17.6% of MNK’s sales fall into category 2 / therapeutic subs, 75.3% of HZNP’s sales are therapeutically substitutable. Also unlike MNK, HZNP’s therapeutically substitutable products have multiple close substitutes

In particular, HZNP’s two largest products (Duexis, Vimovo) are highly substitutable. Each is a single-pill combination of two generically available ingredients – ibuprofen / famotidine in the case of Duexis, and naproxen / esomeprazole in the case of Vimovo. These two products account for just over 40% of HZNP’s US Rx net sales, and are nearly as susceptible to NDC lock-outs as products with A-rated generic alternatives. HZNP’s third and fourth best-selling products, Pennsaid and Ravicti, both have close therapeutic substitutes that are generic, and far less expensive. These four easily substitutable products account for more than 70% of HZNP’s US Rx net sales

The tension between HZNP and formulary managers is largely defined by HZNP’s active efforts to get its major brands (particularly Duexis and Vimovo) reimbursed for patients who could easily do just as well on much cheaper alternatives. HZNP, like VRX, has used specialty pharmacies who seek reimbursement on a patient-by-patient basis by more or less exploiting formulary managers’ appeals processes. The success of this approach relied in large part on the relatively small sizes of the products involved, and on payors not realizing that manufacturers were systematically exploiting the appeals process

Formulary managers obviously now understand how manufacturers have exploited the appeals process, and are likely to NDC-lock products where possible (very easily done on Duexis and Vimovo, less easily done but still highly feasible for Pennsaid and Ravicti), or at least threaten HZNP with NDC-locks as a means of forcing price concessions

 

  1. Different molecules that are equally valid treatments for the same indication
  2. VRX has 24.2%, 49.1%, and 22.9% of US Rx net sales in categories 1, 2, and 3, respectively. Please see: “VRX: The Balance of Power Between Valeant and Formulary Managers – An Empiric Framing”, SSR Health LLC, January 5th, 2016
  3. Generics that are designated by FDA as equivalent using any of several ratings (‘AB-rated’ is the most common) can be substituted by pharmacists for the original brand, or other generic forms of the brand, without the need for a new prescription or other form of physician consent
  4. Ibid 2
  5. Formulary managers communicate available coverage for specific products by linking coverage terms to product-specific National Drug Codes or ‘NDCs’, and pharmacists use NDC numbers to verify coverage status each time a prescription is filled. Formulary managers can easily deny coverage for NDCs with A-rated substitutes by simply refusing to reimburse a given NDC. Such NDC lock-outs are made easier by the fact that pharmacists can substitute the A-rated alternative for the NDC-locked product without having to contact the physician for a new prescription
  6. ‘Nil per os’, meaning patients that are restricted from any oral intake

 

©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 (MKGAY) on both securities-related and non-securities-related topics

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