The Pfizer-Shire Deal Worst-Case Scenario

Earlier this week shares of Shire rose on rumors that Pfizer may be interested in acquiring the company, which is best-known for its ADHD drug Adderall XR. The notion that Pfizer is in acquisition mode has been driving people crazy for days. (See BNET's coverage of Pfizer Pfever here.)

But would a Pfizer-Shire deal make any sense? (Shizer?) Traditionally, we at BNET like to look at the worst-case scenario.

The key thing to note about Shire is that although it is trying to grow other revenues as fast as possible, ADHD still makes up about 47 percent of the company's $778.6 million in Q3 revenue. Of that, $268 million is from Adderall XR and $96 million is from Vyvanse. But the Adderall gravy train ends in April of this year, when a generic from Barr hits the market.

Shire is responding by hiking the price of Adderall by 20 percent. The company wants the price of Adderall to be much higher than its other ADHD drug, Vyvanse. The hope is that patients will switch from Adderall to Vyvanse to get the savings, and then ignore Barr's generic Adderall. At BNET we've previously argued that this is wishful thinking, as patients and reimbursers usually gravitate to the cheapest most effective pill -- which after April will likely be generic Adderall. Now analysts are starting to ask questions about whether Shire can pull this off. Also in the mix is the fact that Barr has only six months of exclusivity on its generic -- after that the real price competition kicks in.

So Shire has 47 percent of its revenue on the line in the next year or so. That's a lot of risk for Pfizer to take on.

Here's what the analysts wanted to know about the Vyvanse-Adderall-generic situation at the last conference call. EVP Mike Cola (top picture) was asked what the difference in copays would be between branded Vyvanse and generic Adderall:

Michael Cola: It's [Vyvanse] consistent with a tier two product. It's somewhere in that $25 to $30 range. ... When we get an authorized generic, many of the plans, and most Medicaid plans, are required -- even though it's an authorized generic, not a full generic -- to put the product [generic Adderall] in tier one. And so the copay will actually be reduced in tier one ... to the $10 to $15 range.

Ken Cacciatore of Cowen & Co.: You don't believe that the differential between tier one and tier two is at all meaningful in this class. And I guess I would say, if investors believe that's not the case and that it is, a difference of $10 or $15 or $20 is meaningful, do you have a program in place -- if indeed that is the case -- to help people get there? Is there smart cards, is there couponing? Or should we simply -- should investors simply believe, don't worry about a $15 or $20 difference, it's largely irrelevant?

Angus Russell: We still do the coupons. As a C2, we obviously can't sample. We do a coupon. We also do a copay at the end of the coupon. So we are trying to make it simple for them.

But the question I get, you haven't really pressed on this in the past, I get this [hypothetical] question, will plans really want to force people to use [Adderall] XR before you use VYVANSE?

And I just don't think the dynamic is there for that to happen. I hear that as a bigger concern out there in the marketplace.

Jack Scannell, Sanford Bernstein: What are you thinking about therapeutic substitution? So, will generic XR do you think have any affect on the script trends for VYVANSE, firstly? Secondly, a lot of state Medicaid programs are having trouble at the moment. And I believe Medicaid is a big funder of ADHD treatments. Do you see any risks there to formularies or coverage?

Angus Russell: Okay, I think I will ask Mike to address those.

Michael Cola: The same answer we've given for a long time on the therapeutic substitution question. I mean, a very different product, metabolized completely differently, I think it will be very hard for somebody to try to force a therapeutic substitution in there.

Cola continued:

The second part of the question was -- the state Medicaid. You know, it varies on a quarterly basis, anywhere from 20% to 25% of our ADHD business.

Michael Cola: I do agree with you, I think state Medicaids are going to be under tremendous pressure over the next two to three years as income from tax at the state level goes down. I would ask you to examine, though, although it's 23% of our scripts, it's really not a particularly profitable part of our business, because we do have very specialized contracts on a state-by-state basis. So I feel our exposure on the bottom line is actually not so great.

Let's assume the most positive scenario: that Shire can continue making its current numbers. Would it still be worth buying? In fact, if you compare what Shire spends on SG&A to make its revenues with Pfizer's expenses, you find that Shire's yield on its marketing dollar is much smaller than Pfizer's. Shire gets $2.43 in revenues for every dollar spent on sales and marketing management. Pfizer gets $3.40, which means the larger company is about 40 percent more efficient in its marketing than Shire.

Bottom line: Even if Shire survives the Adderall generic cliff, combining the two companies could actually drag down the efficiency of Pfizer's SG&A performance.

• Want more of BNET Pharma's "Worst-Case Scenarios"? Click here:
• The Pfizer-Amgen Deal Worst-Case Scenario
• The Pfizer-Allergan Deal Worst-Case Scenario
• The Lilly-ImClone Deal Worst-Case Scenario
• The Worst-Case Scenario in the Roche-Genentech Bid
• Why a Pfizer Takeover of Bristol-Myers Squibb Seems Unlikely
• Odds May Be Against a Pfizer-Bayer Deal