Strategic Consolidation Approaches for Specialty Drug Manufacturers

A new report from Fitch Ratings identifies the most promising business development tactics and targets for 3 small market players in the specialty pharmaceutical space.

Although most specialty drug manufacturers’ business development approaches may be “potentially moderated by debt incurrence covenants,”—or potentially restrained by agreements and limits set with creditors—a new report from Fitch Ratings explores the methods specialty manufacturers can employ to optimize their consolidation activities.

The report assessed the ability of 3 specialty drug makers—Valeant Pharmaceuticals, Endo Health Solutions, and Warner Chilcott, PLC— to grow based on each company’s area of expertise, past acquisition strategies, future patent expiries, major competitors by therapeutic class, and debt capacities. Based on this information, the report authors identified the acquisition targets that would be of greatest value to each manufacturer.

The companies highlighted in the reported were chosen because they are “active debt issuers that hold much fixed income investor interest,” Michael Zbinovec, senior director of corporate finance at Fitch Ratings, told Specialty Pharmacy Times.

The report first evaluated Valeant Pharmaceuticals, a company whose past strategy has included aggressive acquisition activity within the fields of dermatology and neurology. “No high-yield specialty pharmaceutical company has been more active in business development in past years than Valeant,” noted the authors, and limited exposure to drug patent expiration has kept the company’s revenues relatively safe from competition. The loss of the patent for the herpes drug Zovirax (acyclovir) would only represent a 7% decrease in total sales.

The report authors noted that they expect Valeant to continue its expansion through acquisitions and suggested that the company should focus on targets with complementary drug portfolios. According to the authors, Valeant would benefit most from the purchase of assets in the “cash-paying dermatology market,” which are “less reliant on government payers.” Potential targets could include Obagi, which has OTC market share in Asia and produces several prescription strength facial treatments, or Impax Laboratories. Impax and Valeant already co-develop 5 skin medications, and purchasing Impax would provide Valeant with a potential “near-term commercialization opportunity” from the addition of the Parkinson’s drug Rytary. The only drawback from this merger, noted the report, would be the overlap in generic products produced by the 2 companies.

The report dealt next with Endo Health Solutions, a specialty drug company focused on pain management. The company’s current strategy, noted the report, is “undefined, but may follow Valeant’s lead by actively targeting key therapeutic classes.” Endo’s bestseller Lidoderm will lose patent protection in September 2013, and according to Fitch, “[G]rowth of other brand name pain medications and generic drugs will not compensate for the expected decline in Lidoderm sales.” Endo might also have trouble offsetting this patent loss because there isn’t a lot of wiggle room for further debt under the covenant set with its bank.

Instead of continued corporate diversification, a strategy Endo has used in the past, the authors write, “[F]itch believes Endo likely will target commercialized pharmaceuticals and late-stage research projects.” To offset the revenue loss incurred by patent expiration of Lidoderm, the Fitch consultants recommend acquisition of Akorn, Inc, a company with expertise in pain management, ophthalmology, injectables, and vaccines. The report also suggests the purchase of Jazz Pharmaceuticals, which would allow Endo to expand its international reach. Purchasing Jazz, although potentially remunerative in the long run, would be more costly in the short term, stated the report.

The last profile included in the report focused on Warner Chilcott PLC, a company that is set to lose an estimated two-thirds of its revenue over the next few years from the patent expirations of the ulcerative colitis drug Asacol (mesalamine), the osteoporosis drug Actonel (risedronate sodium), and the oral contraceptive Loestrin 24 Fe (norethindrone acetate and ethinyl estradiol tablets, USP and ferrous fumarate tablets). Historically, Warner Chilcott has maintained market share of its therapies by launching “next generation products.” This means the company has extended the life of its patents by reformulating and rebranding its core offerings, a technique that the Fitch authors believe may not be sufficient in the future to compensate for the expected revenue decreases due to patent expiration. The next-generation products released by Warner Chilcott typically have cleaner safety profiles, and the clinical benefit of the new versions is usually “promoted to new patients in order to prompt switching to the new brand,” Zbinovec explained.

There are only a few acquisition candidates that would allow Warner Chilcott to fully recoup its losses, asserted the Fitch report. The company could purchase Auxilium Pharmaceuticals and add a new therapeutic class to its repertoire through Xiaflex, a specialty drug used to treat the connective tissue disorder Dupuytren’s Contracture. “Auxilium management’s expectation for 2013 sales of $325 million to $355 million would erase the detrimental effect of patent loss to [Warner Chilcott]’s revenues,” the report maintained. The company’s other major option would be acquisition of Ironwood Pharmaceuticals Inc, whose irritable bowel syndrome drug Linzess has many other indications in the pipeline.

Although many specialty pharmacies have shown renewed interest in orphan drug development, the companies featured in the report rely mainly on the acquisition of developmental projects that are near completion. The business strategies of these 3 “high-yield debt issuers” do not focus on rare diseases, and the research and development programs at all 3 companies are fairly “light,” noted Fitch’s Zbinovec.

“Valeant looks for low reimbursement risk opportunities in dermatology and neurology; Warner Chilcott’s therapeutic focus is women’s health, dermatology, gastroenterology, and urology; and Endo Health caters to pain management, urology, endocrinology, and health services,” Zbinovec said. “However, Endo Health has in the past shown the most willingness to diversify beyond its core competencies, and may seek new assets depending on the strategy of the new CEO.”