High Drug Prices Are an Unfortunate Reality, And This Company Led the Way
In the United States, prices for prescription drugs can reach remarkable levels. We now have life saving drugs that can cost hundreds of thousands of dollars. This in unfortunate, but since the drugs save lives the cost is worth it for patients.
But, not all drugs save lives. Some simply improve the quality of life and some have questionable value. Even drugs with high prices can have questionable value.
One example is a drug sold by Mallinckrodt plc (NYSE: MNK).
The company, and a company it acquired, have raised the price of a drug known as H. P. Acthar from $40 per vial in 2001 to more than $34,000 per vial, an 85,000% increase.
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This drug is approved for treating 19 different medical problems. The major uses are for a kidney disease and multiple sclerosis (MS). Acthar is also used to treat infantile spasms, a rare form of epilepsy. The drug has been on the market
One of the more interesting aspects of this story is that Acthar has never undergone rigorous testing. The drug was grandfathered into approval by the US Food and Drug Administration because the government didn’t require clinical trials when the drug was brought to market back in 1952.
When testing has been done, independent researchers have questioned the value of the drug.
Benefits of the High Priced Drug
Mallinckrodt plc has built up a sales force to provide doctors with information about Acthar and the company has dedicated resources to help patients obtain approval from their insurance companies for the drug.
These resources can also be used with other drugs. That comes into play after the company announced that it has acquired privately-held InfaCare Pharmaceutical Corporation. This specialty pharmaceutical company focuses on the development and commercialization of proprietary pharmaceuticals for neonatal and pediatric patients.
InfaCare’s product candidate, stannsoporfin, is expected to become the first and only pharmacologic option for the treatment of neonates for severe hyperbilirubinemia, or severe jaundice if and when approved.
To complete the deal, Mallinckrodt made an upfront payment of $80 million. Mallinckrodt is also required to pay up to $345 million as milestone payments. The acquisition is expected to be dilutive to the bottom line by $0.15 to $0.20 per share for 2017 and modestly accretive in 2018.
The company believes there is a large market for stannsoporfin. Experts estimate approximately 750,000 infants are treated for jaundice every year. Among these, a large number are unresponsive to phototherapy.
The combined potential patient treatments required annually in the United States for severe jaundice is approximately 70,000 to 125,000. Mallinckrodt is well positioned to meet this demand with a sales force in place and experience in working with insurance companies.
Mallinckrodt also recently announced it has entered into a licensing agreement for development and commercialization of NeuroproteXeon’s investigational, pharmaceutical-grade xenon gas for inhalation therapy.
This therapy is being evaluated to improve survival and functional outcomes for patients resuscitated after a cardiac arrest. If approved, xenon gas for inhalation will expand Mallinckrodt’s portfolio of hospital drug-device combination products providing therapies for critically ill patients.
Under terms of the agreement, Mallinckrodt will pay $10 million up front with cash on hand to reimburse NeuroproteXeon for certain product development costs, and gains exclusive rights to commercialize the therapy, if approved, in the U.S., Canada, Japan and Australia.
Mallinckrodt will make additional payments of up to $25 million when, and if, certain clinical, regulatory and sales milestones are met. There will also be a tiered, net-sales-based royalty. NeuroproteXeon will continue to be responsible for the cost of development.
Approximately 500,000 people in the U.S. experience cardiac arrest every year, more than half of whom are over 65. When a patient’s heart stops beating, death can occur within minutes but today about 35%-40% of these patients are revived and their heartbeat and blood circulation returns.
However, even when successfully resuscitated, only 30%-35% of these resuscitated patients survive to leave the hospital. Among survivors, coma or brain damage, including impairment of motor function, memory and cognition, are common.
Improving survival and reducing brain damage and impairment is of paramount importance for these individuals and their families. And it’s critically important for the healthcare system as well, given that the average cost of care in the U.S. – from the cardiac arrest through the 12 months following – is roughly $100,000 per patient.
In patients who have had cardiac arrest, low blood flow and poor oxygenation of brain tissue may lead to a number of changes including the opening of calcium channels, which are known to contribute to neuronal injury and death, leading to brain damage.
Xenon is a noble gas that has been used safely as an inhaled therapy in several studies to date. In cardiac arrest, calcium channels in the brain can get over-activated, causing neuronal damage and cell death.
Xenon binds to N-methyl-D-aspartate receptors through a unique glycine-binding mechanism and can help regulate the flow of ions through the calcium channels. By mitigating neuronal damage and cell death, xenon may be able to reduce time in a coma, lower mortality rates and improve cognitive and motor functions.
This therapy is being tested and has shown promise. Now, it is entering the final stage of testing and researchers are optimistic. According to a company official:
“If the planned Phase 3 study is successful and the biological effect seen in the Phase 2 study translates to clinical impact, we believe xenon gas for inhalation has the potential to change treatment paradigms and increase adoption of the therapy in a population of resuscitated cardiac arrest patients.”
A Strategy to Trade the News
The stock has rallied on the news and in the short term is likely to maintain its gains. It’s possible to generate income, a bull put spread could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put generates immediate income, just like a covered call would. But, unlike a covered call, risk is limited.
This strategy meets the objective of the covered call. It generates immediate income and the shape of the curve for potential rewards are exactly the same as in the covered call diagram above.
For MNK, a bull put spread could be opened with the October 6 options. This trade would be opened by selling the October 6 $36 put for about $0.30 and buying the October 6 $35 put for about $0.05. This trade would result in a credit of $0.25, or $25 per contract since each contract covers 100 shares.
The maximum potential gain is $25. The maximum possible risk is the difference between the exercise prices less the premium received. For this trade, the difference between exercise prices is $100 ($36 – $35). The total risk on the trade is then $75 ($100 – $25).
The potential gain is about 33% of the amount of capital risked. This trade will be open less than one week.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy could also simplify tax reporting for investors.
These are the type of strategies that are explained and used TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.