Dealmakers have always flipped companies. Lately, they’ve been flipping something else: ageing pharmaceuticals.
Take Actimmune, developed by Genentech decades ago. By 2012, sales were fizzling. Then rights to the immune-disorder treatment were acquired by a company backed by private equity. The price climbed, 434% in two years, and Actimmune was a hot property. Horizon Pharma snapped it up.
Or consider the old Novartis cold-sore cream Denavir, notching a 372% gain as it changed hands twice with private equity help. Or Dutoprol, 1,057% more expensive after a flip. Or Miacalcin, 3,259% higher.
They’re among dozens of drugs bought with private financing in the past six years, according to an analysis of products in a database kept by the software company Connecture. The price often rises, and the drug’s often resold.
Such manoeuvres are perfectly legal, and at play in a sliver of the prescriptions on the market. But they underscore one of the largely hidden forces behind the surge in costs that incites so much outrage in the US, where drug prices aren’t regulated and efforts by lawmakers to stop what they’ve condemned as gouging have gone basically nowhere.
Flippers tend to seize on drugs with little competition, said Stephen Schondelmeyer, a professor of pharmaceutical economics at the University of Minnesota. “They’re taking advantage of a dysfunctional market.”
The formula’s simple: obtain licensing rights to a medicine, boost the price, put the rights back on the market and pocket a profit. Investors got Actimmune for $55mn, for example, and sold it for $660mn 27 months later.
Target drugs typically have stagnant or declining volumes. Prescriptions may rise only modestly or even fall under the new management, but that rarely matters because retail prices can go up so much.
Plenty of medicines, of course, go through multiple and sometimes astonishing increases without more than one new owner. The EpiPen for allergic reactions climbed about sixfold after Mylan bought it in 2007, a rise that blew up into scandal when it caught Congress’s attention this year. In 2015, Turing Pharmaceuticals, then led by Martin Shkreli, got the rights to the antiparasitic Daraprim and infamously hiked it more than 5,000%.
But flipping, a relatively new phenomenon, is often engineered by freshly minted enterprises focused on pricing, said Pratap Khedkar, managing principal at the consulting firm ZS Associates. Some private-equity firms are attracted to the arena because of the potential for a fairly speedy payout, he said. They may be low-reward deals, “but there is very little risk.”
It’s unfair, though, to blame these firms for seizing an opportunity created by cracks in the system that regulators should repair, said Craig Garthwaite, a health economist at Northwestern University’s Kellogg School of Management. “It is not their job to keep prices low because society wants them low.”
Insurers and pharmacy-benefit managers are taking that task on. Flipped drugs hadn’t until recently been in their sights, because they were zeroing in on costs of top-sellers, but they’ve been widening their focus. In August, benefits manager CVS Health Corp said that next year it will stop covering two drugs Concordia International Corp acquired from Covis Pharma Holdings Sarl, whose majority owner is the private-equity firm Cerberus Capital Management.
The duo, Nilandron and Dutoprol, are up 989% and 1,057%, respectively, since 2013. CVS Health called the drugs examples of “hyperinflationary” increases.
Based in Zug, Switzerland, Covis spent $344.9mn buying 14 licensing rights over three years from companies including Sanofi and GlaxoSmithKline, according to securities filings. Covis boosted prices on six by more than 200%, data compiled by Bloomberg Intelligence show. In April 2015, Covis sold 12 of the brands, along with some generics, to Concordia for $1.2bn. Price rises continued.
Covis didn’t respond to e-mails and calls. Concordia declined to comment on specific increases but said its prices are “near the average of the therapeutic category.” Cerberus declined to comment on the price-rise issue but noted that Covis introduced generics that cost far less than the branded drugs it owned.
Dimitry Khmelnitsky, an analyst at Veritas Investment Research Corp who covers Concordia and has a sell rating on the company, called what the private-equity backed buyers did “financial engineering.” By buying up old drugs that have little or no competition, “you can fly under the radar” and jack up prices. He said Concordia made itself vulnerable to scrutiny by purchasing the drugs from Covis and continuing to increase the costs.
Many companies purchase rather than develop medicines; it can be an efficient business model. The method becomes suspect when costs spiral. Roughly 650 branded drugs doubled between 2011 and 2016, and prices went up 500% or more on about 100 of them, according to data from Connecture, the healthcare technology and data-analytics company.
Of the ones with the most extreme increases, the majority climbed most sharply after they were bought either by private- equity backed companies or those such as Valeant Pharmaceuticals International that have grown primarily through acquisitions rather than R&D, according to a Bloomberg News analysis of purchases and sales of licensing rights and drug- price changes.
Valeant has been under fire, grilled by lawmakers and investigated by regulators. In April, its then chief executive officer, J Michael Pearson, told Congress the company had erred with its “too aggressive” pricing policy. Pearson is a focus of a criminal probe into potential wrongdoing related to the company’s hidden ties to a specialty pharmacy, according to people familiar with the matter. His lawyer declined to comment. Valeant said it’s cooperating with authorities and doesn’t comment on rumours about investigations.
With flipping, flops can be brought back to life. Savient Pharmaceuticals went bankrupt after Krystexxa, an infusion to treat gout, didn’t catch on. Crealta Pharmaceuticals — backed by the private-equity firm GTCR — bought Savient’s assets at auction for $120mn in January 2014 and moved the cost for Krystexxa up 160%, to $14,000 per vial from $5,390, according to price data provided by First Databank and compiled by Bloomberg Intelligence.
In January 2016, Horizon acquired Crealta for $510mn, and has since raised the drug’s price 21%, to $16,909. The company said it has “used occasional price increases to further invest in the clinical development” of the drug. GTCR declined to comment. Krystexxa, approved by the US Food and Drug Administration in 2010, is a rare example of a new drug to be flipped.
As for Actimmune, its rights were acquired in June 2012 by Vidara Therapeutics International Ltd, backed by the private-equity firm DFW Capital Partners, and sold to Horizon when it purchased Vidara in September 2014.
Today the shot lists for $538,000 a year, up 868% from the time of Vidara’s purchase, including an 81% lift by Horizon. The drug was Vidara’s sole product. The company’s co-founder and majority shareholder, Balaji Venkataraman, couldn’t be reached for comment. DFW’s managing partner Keith Pennell declined to comment.
Horizon noted it covers most patients’ co-payments and that after discounts, the annual cost is about $257,000. The company’s acquisition of Vidara “was the first piece in building a leading orphan-medicines business,” Horizon spokesman Geoff Curtis said, referring to drugs for rare conditions. Horizon will later this year complete a final-stage trial of Actimmune to treat the nerve disease Friedreich’s ataxia.
During the Actimmune flip, Venkataraman and DFW did another deal, helping fund Sebela Pharmaceuticals. Registered in Georgia in August 2013, Sebela bought Miacalcin, an injection that combats dangerously high calcium levels, from Novartis in August 2014. Over the next eight months, Miacalcin went up more than 2,800%, to $1,987 from $68 per vial.
About a year later, Sebela sold Miacalcin “for a substantial gain,” resulting in a special distribution to shareholders, according to an annual report from one of DFW’s investors. The buyer was Mylan, which has since moved the drug’s price up 15% to $2,283.
Mylan said it bought Miacalcin “as part of our commitment to offering one of the industry’s broadest portfolios to customers and patients.” It declined to comment on the price rise. Sebela didn’t respond to phone calls and e-mails. Mylan purchased Denavir, the cold-sore cream, when it acquired a portfolio of topical drugs from a private-equity backed company earlier this year, and hasn’t boosted the price since.
“The problem is likely larger than we realized because a lot of these drugs are under the radar,” said John Bennett, CEO of Capital District Physicians’ Health Plan, a nonprofit insurer in Albany, New York. While flippers may be behind only few of the most most significant drug-price increases in the market, “the bottom line is it all adds up. We all pay.”