Description
FLML: Short. Much of this company’s valuation hinges on one drug, Coreg CR, which I expect will disappoint this year. The reimbursement environment is getting much tougher, and I believe Coreg CR is an undifferentiated product in a crowded competitive environment, with cheap alternatives available and a difficult mix of payers involved. I also think physicians are unlikely to switch many patients here. Plus, there is at least the possibility that the drug may only have exclusivity for a few years. Meanwhile, the pipeline is weak. Stock is largely valued off Coreg CR so should have a lot of downside, and near-term catalyst from the launch disappointing.
Background:
Coreg is GSK’s branded drug for congestive heart failure and hypertension with ~$1.5 B of U.S. sales in 2006. Coreg goes generic in 9/07, and GSK partnered with FLML to introduce another product Coreg CR, which has a very similar profile for these indications. If GSK is successful at getting patients on Coreg CR, it can extend its franchise beyond the patent expiry of Coreg this year. FLML has perhaps only a 5-7% royalty/mfg fee on this drug.
Issues:
I believe Coreg CR has very little differentiation vs. Coreg (only major difference I have been able to find is that Coreg CR is taken once a day vs 2x/day Coreg). Contacts in pharma and formulary managers have told me that insurers are becoming much tougher on attempts by pharma to switch patients to a new drug that is not well differentiated from a cheaper generic (or a drug that is about to go generic). Reimbursement experts I have spoken with are quite negative, as several felt that Coreg CR had little clinical differentiation from Coreg and would largely be a 3rd tier drug. This means patients would have to pay an extra $35 - $55/month just to take the pill 1x/day instead of twice. One expert even suggested they would require multiple steps before a patient could get on the drug, and even then the patient would have to pay 50% of the total cost of the drug. Competition from Toprol XL (also a 1x/day drug, in the same class and in the process of going generic itself) and FRX launching Nebivolol (also in the same class of drugs) will hurt as well.
The mix of payers involved exacerbates the problem. According to the CDC, a majority of heart failure patients are of Medicare age. One payer said, "I don't think Medicare plans will add this, period," and the consensus among those I spoke with was that getting these plans to position the drug favorably on formularies would be very tough. Plus Medicare patients tend to be price-sensitive since above a certain limit they have to start paying drug costs out-of-pocket, so they may often opt for the cheap generic.
Physicians also point to the critical importance of affordability and formulary status. Even those that are most positive about this drug, based on the argument that better compliance with a 1x/day drug leads to better outcomes, admit that patients are unlikely to want to pay extra for it. One physician mentions insurers making it very difficult for docs to get authorization for drugs. Another said – “if I have to make a call, forget it.” Plus, analysts have failed to appreciate the fact that some doctors are reluctant to switch chronic patients who are already stable on a drug. Analogies from other drugs including Ambien CR, Wellbutrin XL, Vivitrol, and BiDil, when understood appropriately, all highlight the problems with Coreg CR. GSK hopes to get new patients (who were not even on Coreg before) on this drug now for hypertension that they have a 1x/day option for this indication, but docs tell me that cost will be an issue.
Plus, this drug only has 3 years of Hatch-Waxman exclusivity, so there is at least the possibility of a generic at the end of that time period. Meanwhile, the pipeline includes Micropump and Medusa technology. It could create some surprises, but the Micropump technology which produced Coreg CR has yet to create something truly differentiated, and the Medusa technology is still early. Regardless, it is clear based on analyst reports and models that the substantial majority of the value of this company is based on Coreg CR, so even an exciting new partnership for a drug in development should not have as much effect on the stock as the results from this approved drug. This plus mgmt departure last year and some insider selling do not present a positive picture.
Street estimates:
Despite these issues, the street assumes Coreg CR becomes an $865 MM product this year. I would note that the launch is taking a while, so when you consider the time required for the drug to be sampled and ramp, this would require an extremely high level of conversion of patients from Coreg to Coreg CR by the end of the year.
Valuation:
This is not a cheap stock. Co has an approximately $700 MM market cap, but Coreg CR is the only approved product (and arguably the only product which is even close), and as such should account for most of the valuation. Co trades at high multiple of out-year sales but I think based on extremely unrealistic Coreg CR estimates so leaves room for a lot of downside. Per above, FLML only has a single-digit royalty/manufacturing fee on GSK's Coreg CR sales. So the simple math suggests that this valuation discounts a large drug that is around for quite a while – but I think this is a much smaller drug than expected and that the drug could be around for a relatively short period of time.
Catalyst
Catalysts: First, post GSK’s launch of the drug (GSK expecting Q1 07), prescription data could be problematic given the issues mentioned above. Second, given the launch is occurring later than some expected, some analysts may begin to revise their numbers downward. Third, even if people hold on through a late launch and argue that prescriptions are weak due to sampling, there is the possibility that a generic competitor files an ANDA challenging Coreg CR and we find out about this through a lawsuit, leading to concerns about the length of Coreg CR’s time in the market without generic equivalents. Fourth, later this year I expect analysts to have to materially decrease their estimates for Coreg CR. Fifth, there is the possibility that the Coreg generic launch in September will be a competitive one, which is not necessarily expected by the market but would lead the Coreg alternative to be very cheap compared to Coreg CR, perhaps increasing cost pressures and reducing the potential for Coreg CR.