On Friday, Concordia shares came under significant pressure largely due to the tabling of a UK Bill to help control the cost of drugs and medical supplies. In addition, the company was removed from the index the same day, putting further pressure on the shares.
NHS tables Health Service Medical Supplies (Costs) Bill. The thrust of the Bill is to align the current Statutory Scheme for drug reimbursement with the much larger Voluntary Scheme (Pharmaceutical Price Regulation Scheme – PPRS). While the Bill provides for the provision of pricing and other information and the ability to disclose this information in specified circumstances, the key to the Bill was the recommendation of implementing a 7.8% payment (cut) to the Statutory Scheme to bring it in line with payment ratios under the Voluntary Scheme (PPRS).
Impact on Concordia not clear at this point. While the Bill is clear about the impact (a 7.8% payment) as it relates to Statutory Scheme drug sales, for those companies that sell unbranded medicines under the Voluntary Scheme such as Concordia the impact is less clear. CXRX management believes the government will “limit the price of unbranded medicines” and thereby limit future price increases in markets with little competition. In essence, management believes that CXRX will not be required to make the 7.8% payment and should only be faced with limited price increases in markets with little competition. However, the government’s website states that the Bill will “enable the government to require companies to reduce the price of a generic medicine, or impose other controls on that company's unbranded medicine...” As such, we believe it would be prudent to adopt a more cautious stance, even if CXRX were correct and does not need to make the payment, given the potential for price reductions.
CXRX impact – forecast ~$32MM revenue reduction in 2017 at 7.8% payment. While CXRX receives ~£6 per prescription, less than the maximum £8.40 that a UK patient must pay before being fully reimbursed, we still expect that the Bill could affect CXRX in some form. This could be a price reduction on some drugs or some level of average payment. Given the uncertainty, we have reflected a simple 7.8% payment on the company’s UK portfolio even though a number of drugs would likely not qualify. We expect mid-year 2017 implementation of the Bill. We also believe this will remain an overhang for 6–12 months until the specific details of how the Bill ultimately influences CXRX are known.
We have included a sensitivity analysis below and note that based on the Department of Health’s Public Consultation on changes to the statutory scheme to control the prices of branded health service medicines, the NHS consulted on a range of payment percentages between 10% and 17%. Ultimately, the Impact Assessment focused on a 7.8% payment percentage. We have used the 7.8% payment percentage in our forecasts but have outlined 5% and 10% payment percentages in Exhibit 2 for informational purposes. Applying the 7.8% payment system proposed in the bill to 2017 pro-forma UK revenue estimates would yield a $31.6MM revenue reduction assuming the 7.8% is applied to all UK CXRX drugs even though a number may not be impacted. We anticipate that the payments will begin mid-2017.