Shire Pharma vs Tribal Sovereignty. Who Will Win?

Shire is a value-priced specialty pharma with several catalysts ahead, one of which is taking on the Indian tribal sovereignty issue. 

Shire Pharma (SHPG) is a diversified, Ireland-based specialty drug firm. Shire has grown primarily through mergers and acquisitions, including the Transkaryotic Therapies acquisition in 2005, establishing its genetic disease business and the merger with New River in 2007 including full rights to neuroscience drug Vyvanse. Shire completed the acquisition of ViroPharma (genetic diseases) in 2014, NPS Pharma (internal medicine) in 2015, and Baxalta (hematology, immunology, and oncology) and Dyax (genetic diseases) in 2016. 

The current PEG ratio for Shire is just 0.77, a level well below the industry average of 1.4.

Of interest to shareholders is the recent lawsuit SHPG filed against Allergan (AGN).  Shire's lawsuit centers on the dry-eye drug Restasis, Allergan's second-biggest selling drug, after Botox, with $1.4 billion in U.S. sales last year.  SHPG alleges Allergen is colluding with Medicare Part D insurers to keep out its more effective, and similar cost, dry-eye drug Xiidra.  Xiidra received FDA approvals last year and the firm has filed for similar approvals in the EU.

Unknown to many, untreated dry eye disease can lead to vision loss, especially with patients with glaucoma.

The complaint, filed in federal court in Trenton, N.J., says Shire offered steep discounts in bids to secure insurance coverage of the company's dry-eye drug Xiidra but the Part D plan providers refused, due to Allergan's "bundled discounts, exclusive dealing" and other tactics.

Approximately 13% of Part D patients have access to Xiidra on their drug formularies, compared with about 88% of commercially insured patients, according to the filings.  It is this vast restriction of the neediest – seniors with vision issues - that is the basis of Shire’s complaint.   In addition, Shire is not the only firm fighting these type of Medicare drug availability issues.

From Dow Jones News:  The lawsuit is the second in the past few weeks to take aim at the closely guarded contracts between drug makers and health insurers and pharmacy-benefit managers that play an important but hidden role determining which drugs patients can get and will sell well. Last month, Pfizer (PFE) Inc. filed a similar suit alleging Johnson & Johnson (JNJ) used "exclusionary contracts" to shield its arthritis drug Remicade from Pfizer's biosimilar.

 The lawsuits reflect just how influential the contracts between drug companies and drug-benefit managers have become in the commercial success of prescription medicines at a time when health plans are trying to control costs.  In the name of limiting spending, drug-benefit managers have been securing steep discounts with one drug company in exchange for restricting access to another company's product. The recent lawsuits are exploring the legality of these increasingly common contracts.

In early September, Allergan sold its Restasis patents to an Indian tribe in a legal maneuver designed to avoid challenges filed at the U.S. Patent and Trademark Office. The Shire lawsuit follows Allergan's announcement on Sept. 8 that it transferred its Restasis patents to the Saint Regis Mohawk Tribe in upstate New York, whose sovereign status could limit legal challenges. The Tribe subsequently agreed to license the patents back to Allergan. 

Much like the tribal casino business is sheltered within the tribal sovereign status, the new avenue taken by Allergan may be the tip of the iceberg, if let stand, with other drugs companies seeking patent extensions or shelter from patent infringement lawsuits by contracting with Tribal nations to exploit their sovereign status. 

Last week, four U.S. senators called for a probe of whether the unusual move was anti-competitive and intended to keep drug prices high.

The lawsuit should be of interest to SHPG shareholders and most all pharma investors. Combined, the SHPG and PFE suits seeking to negate the Indian sovereignty issues could outline the new face of drug patent protection.   

SHPG is recommended for additions to health care portfolios.  While not as well-known as some of its larger peers, Shire could offer better potential than many in its industry.   The current SHPG price of $155 allows for plenty of gains to Morningstar’s target price of $218.   Evercore ISI Group rates the stock as Outperform with a $196 target and Cantor Fitzgerald rates as Overweight with a $222 target. These targets would equate to capital gains potential between 25% and 43% - and worthy of investor’s time for their research

All pharma investors should keep an eye out for how this one plays out (pun intended). 

This article first appeared in the Oct 2017 issue of Guiding Mast Investments.  Thanks for reading,  George Fisher