If you're diagnosed with a severe allergy that could lead to life-threatening anaphylaxis, then you're probably carrying around one of Mylan N.V.'s (MYL +0.00%) EpiPens. Even if you don't own an EpiPen yourself, you've likely heard of the device due to recent media coverage regarding the price of the epinephrine auto-injector. Is Mylan justified in hiking the price of this life-saving tool? Or is this just one more example of the U.S. healthcare system gone awry?
In this episode of The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes and contributor Todd Campbell scrutinize Mylan's EpiPen fiasco. Additionally, the duo also discuss an unexpected FDA rejection of Portola Pharmaceuticals' (PTLA +0.00%) AndexXa and Pfizer's (PFE +0.29%) multibillion blockbuster acquisition of Medivation (MDVN +0.00%).
A full transcript follows the podcast.
This podcast was recorded on Aug. 24, 2016.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your healthcare host, Kristine Harjes, and I've got my usual sidekick, Todd Campbell, calling in. Hey Todd, how's it going?
Todd Campbell: Hi, Kristine. Boy, do we have a packed show today.
Harjes: We have a lot to talk about, yeah. It is August 24, and we were going to talk about pet healthcare today, but this past week has had so many interesting healthcare stories that we decided to save that episode for another time, maybe next week. Instead, we'll focus on some recent news items. One benefit of that is that it's not too late if you want to call in and leave us a message. You can tell us a crazy pet story, or leave us a money-saving pet tip. Thank you to those who have called in already. Our number is 866-677-3665. If we like your voice mail, we'll play it on the show when we eventually get around to doing our pet med show.
But rather than pet meds, today we're going to talk about Pfizer's acquisition of Medivation, and also the pricing hubbub surrounding Mylan's life-saving EpiPen.
But first, we wanted to do a little update on Portola Pharmaceuticals. Last Wednesday, we started our episode by mentioning Portola because they were expecting an FDA decision that day on its most advanced drug candidate, which is a reversal agent for a popular new class of blood thinners. Unfortunately, Portola did not receive the green light that they were expecting, and I was also expecting. Instead, they received the dreaded complete response letter, which is what it's called when the FDA basically says, "No, we're not going to approve this drug, at least not right now under the current conditions." When we taped last Wednesday morning, the stock was at $27. It's now down to $19, which is a 27% drop. What did you make of the news, Todd?
Campbell: I don't know about you, Kristine, but I was refreshing, refreshing, refreshing all day on Wednesday, waiting to see when an announcement would come out. And I got to 4:00, and I was like, "That's interesting," because you know it's summer and people at the FDA are not sticking around much past that. I don't think Portola came out and actually announced that they had gotten the CRL [complete response letter] until after my bedtime, anyways.
Harjes: Yeah, which was a little bit surprising. This was the first instance I know of that there was such a delay. We were expecting to know this in a very public way on that date, I think it was the 17th of August. We didn't really have full information until the next day, and I'm not sure if that was a delay on the company's part, or if that was the FDA. Either way, there's now a lot of suspicion and tension going on about, did management intentionally delay the release of this information?
Campbell: Right, and you saw the shares sharply sell off around 3:00.
Harjes: On Wednesday.
Campbell: Right, on Wednesday. I tend to think the CRL had been received, rumor was maybe getting around the company. And this goes to show how surprising this is. The drug in question was a drug called Indexa, and Indexa was going to be, if approved, the first reversal agent that could be used against a class of anticoagulant drugs called factor Xa inhibitors. Factor Xa inhibitors are huge-selling drugs, more than $5 billion a year in sales. But there is no FDA-approved way to reverse their effects. If they're being taken by an elderly person, that person slips and falls and maybe has a bleeding event, they have to use things that aren't necessarily the best things out there to stop the bleeding. And that has a lot of people, including myself, thinking, "This drug has a really good chance of approval, because it showed in clinical trials that it works, it can stop the activity of these drugs."
Harjes: Right. It had very strong clinical results, as you mentioned. Then, what did the FDA have to say? Why did they say no?
Campbell: There were three things that were highlighted by the company in the conference call that the FDA cited for the reasons for issuing the CRL, or the rejection. One was that they had, we'll call it concerns, about the manufacturing process, the research facility that was going to be manufacturing Indexa, in the pre-approval meetings that the company had had with the FDA. They had walked away from those thinking that any issues that were raised were minor and would not require derailing the application or fixing ahead of the approval date. Obviously, that's not the case, because it was the first and the most major thing cited by the company as the reasons for rejecting it --
Harjes: I'll point out, before moving on to the other reasons, that this manufacturing, that's something the FDA is cracking down on more and more. We saw this with Valeant last month, there is another case for AstraZeneca in May for a cholesterol drug, Opko has had some bad news regarding manufacturing from the FDA. And Portola would be a first-time manufacturer, too. So, in that regard, maybe it's not entirely surprising that they didn't have the manufacturing capabilities 100% ready to go.
But the reason that it actually is pretty shocking is because they had been so pointed at the management of Portola, saying, "Yes, the messaging that we've received from the FDA is that there are only minor issues, which are fixable, which were all over, we're on top of this and it shouldn't be a concern."
Campbell: It certainly raises some questions about, do we have the right captain at the ship? Even if we do have the right captain of the ship, there's been some stumbles at Portola this year that have been...falls, trips, rolling downhills. These were pretty big stumbles. And this is obviously a big one. You've got the manufacturing issue. There are a lot of different controls that go into producing drugs, and there were some things that maybe they could have resolved ahead of time. This is not a deal breaker. The manufacturing stuff can get resolved, just like they did with Opko, with Rayaldee when the FDA issued a CRL because of their manufacturing, and later went on to approve it. So this is not a deal breaker by any means.
The FDA also came out and said, "Listen, we want more information, because you've said that you want this drug approved for use with Johnson & Johnson's Xarelto and Pfizer and Bristol-Myers' Eliquis, but you also listed two other drugs, and frankly, we don't have enough data supporting approval for those two other drugs."
Harjes: And that alone wouldn't have caused the rejection -- at least, I don't think so, and Will Lis, the CEO of Portola, doesn't think so. But this was supposedly in the contents of the letter. I say supposedly because you never actually really know the contents of these CRLs, your complete response letters. You kind of have to take the company's word for it.
Campbell: Exactly. And the last thing they had said is that the FDA had requested some information about some various cohorts in the studies for the data that was submitted. Portola submitted that information over the course of the past few weeks, and frankly the FDA just didn't have enough time to review that information. So you had three different things that caused the CRL. All of them were unexpected by Portola's management. None of them, ultimately, should be a deal breaker for eventual approval. However, now the timeline for such an approval is up in the air, and it's anyone's guess.
Harjes: Exactly. The company is hoping to resubmit by the end of the year, but this is a setback, definitely, in terms of timeline, if not so much in terms of whether the drug actually works. I think it's clear this point that the drug does work. These are other issues aside from that.
Campbell: Right. And then it comes down to the question, Kristine, what do you do if you're an investor? The market cap of that company is now only $1.2 billion. That's arguably pretty small, given the market opportunity that would be available to eventual approval of Indexa. The company estimates about 100,000 patients a year could benefit from Indexa's use. Price tag of $3,500 to $5,000, somewhere in that range, wouldn't be out of the ballpark. So, you've got a drug that could do a few hundred million dollars in sales. Maybe $1.2 billion is kind of light based on that opportunity.
Harjes: Right. I personally remain pretty bullish on this one. There's definitely a risk of dilution. That's probably the biggest negative to come out of this, that they're now going to take even more time before they start to turn a profit. In the meantime, they have to keep their research efforts going, they have to keep the lights on.
Campbell: Yeah, they're spending trailing-12-month expenses of about $264 million. They have enough money to get them into 2017, but God forbid any more setbacks, because at that point, they'd have to go out to the market and start raising money.
Harjes: Exactly. The other big risk to keep in mind here is that, this has become a fairly emotional stock. Without actual earnings, people are trading based on their emotions. To me, that's just a reminder that if you're into a company, whether it's Portola or another company, be interested in it for the long term. I have had this thesis about Portola, and it is a long-term thesis, it's three- to five-year, maybe even more than that. And it's only been a year, a year and a half, of following this company. For me, I personally just need to hang tight. It's tough to watch this kind of swing in the price, especially not going in the right direction.
Campbell: Yeah. I'm long the stock as well. I didn't sell it. There's an opportunity out there, and the opportunity is greater than the $1.2 billion market cap. It's part of a diversified portfolio. It's also a good reminder for people especially in biotech to make sure they're spreading their money and their investments around rather than putting all their eggs in one basket.
Harjes: All good takeaways. Moving on from a tiny, unprofitable biotech to a drug-making kingpin, let's hear your thoughts on Pfizer and the $14 billion Medivation acquisition, which was announced on Monday.
Campbell: This was probably the most-forecast acquisition in biotech history. You had Sanofi come out and make two different very public offers for the company. You had Medivation's board reject those very publicly, and then say, "We'll accept bids, start your bidding." We've written about it, I've written about it. This is definitely something that was very well-known, that the company was shopping itself around.
However, the price tag that Pfizer's paying, I will admit, that shocked me.
Harjes: Exactly. Sanofi had previously bid $58 per share for Medivation. Pfizer is paying $81.50 in cash per share.
Campbell: Yeah! Nice to have an extra $14 billion kicking around, right?
Harjes: Yeah, I'd like that in my pocket.
Campbell: I mean, it's a huge premium. About a month ago, I wrote an article on The Fool where I said that a relatively aggressive price might get you to a value of $12.5 billion. Pfizer paid $14 billion for a company that this year thinks it's going to generate a little bit less than $1 billion in revenue.
Harjes: At least it's profitable! That's good!
Campbell: Oh, yeah! And the benefit of being able to do this deal in cash, and one of the reasons Pfizer was able to win this bidding war, was its ability to pay for it in cash, is that there's no financing drag. They were able to do this deal and still say within the first year, "This is going to add $0.05 to investors' earnings per share."
Harjes: Right. And the main catalyst behind why Pfizer is even interested is for this drug called Xtandi, which is a prostate cancer drug that is co-marketed by Medivation and also a company called Astellas. It started of in just post-chemo in 2012, but in 2014, when it was approved for pre-chemo usage, sales took off.
Campbell: Yeah. This is a huge, mammoth indication. Pfizer isn't buying it because of the trailing-12-month sales that Medivation posted. Pfizer is buying it because Xtandi already has 51% of the market in its two approved prostate cancer indications. The addressable market, in earlier treatment for prostate cancer, is absolutely massive. I've seen numbers tossed around for peak sales forecasts for this drug that go anywhere from $6 billion to $9 billion per year. Obviously, in order to get that, you're going to need to be able to expand its use to earlier stages of cancer. But, we've seen, the company is already conducting tasks and trials. We've already seen some of that data come out, and so far, so good. In October, they're expecting the FDA to make a decision on whether or not to include in the labeling trials that showed that it did just as well as Casodex, a very well-used drug among urologists in treating prostate cancer, with 500,000 scripts written every year. The opportunity in prostate cancer is even bigger than it is now, which is pretty amazing, considering that you're talking about a $2-billion-plus-per-year drug already.
Harjes: Right. And it's important to remember, Pfizer doesn't get 100% of this revenue. Medivation splits their U.S. profits on Xtandi in the U.S., and they get double-digit royalties on Xtandi sales overseas. So, they still do have to send a good chunk of that profit back to Astellas.
Campbell: Right, which is why we have trailing-12-month sales, forecasts for this year like $950 [million] to $960 million in revenue for Medivation. The royalty rate -- because people probably want to know that -- I think it's about 15% on ex-U.S. sales that Pfizer will now get.
Harjes: Right. So, Xtandi, clearly a big deal, could be poised to have its label expanded considerably. Definitely a big catalyst in this acquisition. But, also probably important to point out that Medivation does have two other drugs that are in development, one of which is Talazoparib...
Campbell: Sure. (laughs)
Harjes: That's being studied in breast, prostate, lung, and ovarian cancers, could get its first approval, maybe, in 2018. I've seen one estimate for a little under $1 billion in peak sales. Medivation also has another early stage drug in development for brain tumors and lymphoma. There is a little bit more to this pipeline than just Xtandi.
Campbell: Right. You could argue that the purchase price is based not only on expecting a doubling-plus in Xtandi's peak sales over the course of the next coming years, but also an approval of Talazoparib. That drug was formally owned by BioMarin, Medivation bought it. There's a trial ongoing with data expected next year. If those results are solid, yeah, like you said, they could have another $1 billion drug on the market by 2018. So, there's a lot of different reasons to like this deal for what it does to Pfizer as far as reenergizing or fueling its future growth. And Pfizer has not been shy about doing acquisitions, and it's not been shy about saying, "Listen, we're back to picking up year-over-year sales growth."
Harjes: I would also argue that Pfizer hasn't been terriby successful with its acquisitions, at least not lately. They need a good acquisition now, especially with their post-Allergan failure. We talked about that on the show, initially, when the breakup fell through for this merger between Pfizer and Allergan. And I would also argue that their recent acquisition of Anacor for $5.2 billion for this one drug, crisaborole, I think that was probably too much money that they paid for it. Some say the drug could hit $1 billion in peak sales, but there is a ton of competition in the space that it's working in, including some from Celgene. Honestly, when I look at this, I don't quite like the deal. What do you think? Do you?
Campbell: I like it because it's immediately accretive. I think if they weren't able to say that it was immediately accretive to the bottom line, then I would agree with you. But as long as we're able to have it boost profitability based on its current sales pace, not including any other future approvals, then I think it's fine. It wasn't cheap, that's for sure. But it's fine.
Harjes: I would agree with that. I don't necessarily dislike the thought behind it, I think maybe it's just the price tag that I'm having trouble getting behind.
The price tag, and the fact that Pfizer is a very well-known name, has made this news story really hit a lot of the major outlets, which, for the healthcare stories that you and I normally follow and talk about on this show, I don't normally see them in general news. But not only did I see this Pfizer story, but I also saw the next story that we're going to talk about, which has to do with Mylan and their EpiPen in the major media outlets. I don't want to say it's been a good week for healthcare in the news, because I'm not sure if this next story is necessarily a good reflection of the healthcare industry, but it's certainly been an interesting time to be following healthcare news.
Campbell: Yeah. Does it happen to be an election year, by any chance?
Harjes: Oh, shoot, I forgot about that! Yeah, I hadn't seen any stories anywhere!
Campbell: Yes, EpiPen is an incredibly expensive drug relative to where it was a decade ago, and people are up in arms over this cost, because EpiPen is a life-saving drug. It's basically a shot of adrenaline that you can give into your thigh if you're suffering from a severe or life-threatening allergic reaction. Say you have a nut allergy, and you accidentally ate some nuts. This is a life-saving drug. And people are saying, "Wait a minute, how can you go from having a life-saving drug that has had no real changes to it over the course of the past decade, yet the price of it has increased fourfold?"
Harjes: Right. That's the heart of this issue. Somebody broke the story that this drug, which has been out there for a while -- and it's not even a brand-name drug itself anymore, it's actually a generic drug. But the brand-name thing going on is actually the delivery mechanism itself, this pen that you can stab yourself in the thigh with. It's only delivering about $1 worth of this generic drug. But people are up in arms about the price increase for it. The pen itself costs about $100 for a pack of two in January 2009. Now, it's up to $600. This is something that's pretty widely used. I've seen estimates that 1 in 50 Americans are at risk for the kind of allergies that EpiPen is designed to fight. And many of these are kids. And I think that's really why people are getting defensive here. Not only is this a tremendous price increase for a widely used drug, but it's something that saves children's lives.
Campbell: Right. And the other thing, too -- when you talk about healthcare and drug discovery, it's a very complex subject. It's much more complex than, say, making a new toy. If I can build a football for $1 and sell the football for $12, should I be able to sell that football for $12? The problem is, there's not nearly as much that has to go into gaining regulatory approval and proving that whatever it is that you have is safe and effective enough to be on the market. So the costs are much higher for drugs, and the drug delivery systems like EpiPen. And I think that's something that everybody has to remember. These companies take on a big risk when they innovate, and that costs deserves to be recouped to some extent. I think the real argument is, "Wait a minute, why are you able to increase the price 15% in Q4 of 2015, and then another 15% in Q1 of 2016, without having done anything to improve that pen delivery system?" It's a fair question to ask.
Harjes: Especially because, meanwhile, the compensation for CEO Heather Bresch has increased from $2.4 million to $18.9 million, between 2007 and 2015.
Campbell: Right. And then, on top of that, there's the whole, "Hey, by the way, did you notice that Mylan did a tax inversion where they moved their headquarters overseas on paper to be able to avoid or lower their corporate tax rate?" So, there's a lot of different moving pieces where we look at this and say, this isn't necessarily a company that's acting in good faith with U.S. citizens, I suppose would be the argument. And that may be one of the reasons now, that the CEO is probably going to have some explaining to do in front of Congress.
Harjes: And to add another layer to this story -- you mentioned earlier that it's an election season. That's actually very important to this story. You have a handful of senators that have decided to write letters and ask Mylan for more information about what exactly is going on. And you can see why. This is a great opportunity for a representative to stand up for the people, to go in and lay down the law against these gigantic conglomeration healthcare companies that might be abusing the small people. I get that, I totally get that. But when you start to involve politics here, another thing you need to take into consideration is, Heather Bresch's father is a West Virginia senator named Joe Manchin. There's just so many political elements to this story. Of course it's going to blow up into this big, sensational investigation that's being covered by outlets left and right.
Campbell: What we don't want to lose in this whole discussion, or maybe what this points to is, the whole question of, how drug prices are set in the U.S. versus other countries, and are there changes that are necessary? How do you have a free market where supply and demand should dictate price? And in this case, supply and demand is dictating a price that is, obviously, at least this high, because there's limited competition, currently, on the market in the U.S.
Harjes: Right. Something I feel like we need to bring up is Mylan's defense here. Mylan says that it's changed the price of EpiPen over time to better reflect important product features and the value the product provides. They say they've made a significant investment to support the device, which is, of course, true. And another thing is that Mylan actually does give away a lot of these. They have a coupon program, although it only helps people that have insurance. 80% of the people using that coupon program have paid nothing for EpiPens. Mylan also has a program to give schools these EpiPens for free. About half of U.S. schools have signed up. But, there are also some issues there. The program only gives each school four EpiPens, and the rest have to be bought themselves.
And then you get the opposite side of that coin, where Mylan spent about $4 million in 2012 and 2013 lobbying for access to EpiPens as a whole. They pushed legislation such as the 2013 School Access to Emergency Epinephrine Act, that's the drug in EpiPens, which encourages schools to stock epinephrine auto-injectors. That's the generic way of saying "an EpiPen."
So, I don't know. I don't know if the company really has a valid defense here. I can see a little bit of both buckets.
Campbell: Kristine, I saw a study, and unfortunately I can't remember exactly where it is, I'll have to look it up and get back to listeners. But I saw a study that showed that, when drugs are about to face generic competition, in the two years leading up to that launch of generic competition, the prices of those drugs tend to rise substantially to try to bring forward some of those sales before they face that threat. I think it shouldn't be ignored by investors that earlier this year, the FDA actually rejected an approved generic alternative to the EpiPen that was being made by Teva Pharmaceutical. So yes, this year, there was supposed to be another competitor on the market. Unfortunately, that got sidelined, and now Teva doesn't think they'll be able to get that product on the market until 2017, maybe 2018. At that point, price competition comes in, and the price should naturally go lower again. So, this could be a temporary phenomenon.
And obviously, there are lots of different things that are going into this, including health insurance and the use of high-deductible plans, drug formularies that are maybe moving EpiPen higher up in requiring higher co-payments and co-insurance. This is really something that's affecting not necessarily people with Cadillac insurance plans, but more like people in middle-income families, maybe they're getting insurance through the exchanges, or maybe can't afford the best insurance plans on the market.
Harjes: It definitely leaves you with a lot to think about. A lot of moving parts, a lot of people with different opinions coming in. Definitely an interesting story to watch. Folks listening, thanks for tuning in. I hope you found today's show interesting. If you like Industry Focus, leave us a nice review, or a bad one, if that's how you really feel. Your feedback helps us make the show better, so we appreciate it. It also helps us get our show in front of more eyeballs, or ear lobes, I guess, since it's audio.
As always, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Kristine Harjes, and on behalf of myself and Todd Campbell, thanks so much for listening and Fool on!
