Recently, Sun Pharma
received a preliminary injunctive relief
from US courts for its product Levulan Kerastick against Biofrontera. Sun Pharma, via its subsidiary Dusa Pharma, has alleged that Biofrontera inappropriately obtained confidential product information from former Dusa employees to sell and market the defendant's own products Ameluz and BF-RhodoLED. Levulan is a significantly important product for Sun Pharma. Levulan posted a revenue of $94mn in FY18. This is 2.3% of Sun’s total consolidated sales and 6-7% of its consolidated FY18 EBITDA (our estimate).
We discuss Levulan here as part 4 of our pharma opportunities series. We have covered Enbrel
in our previous three parts.
What is Levulan Kerastick?
Levulan Kerastick is a unique photodynamic therapy (PDT). Levulan Kerastick PDT is a two-part therapy indicated in actinic keratosis (AK) treatment. In the first part of this therapy, aminolevulinic acid HCl solution are applied on the skin area affected by AK. This solution is absorbed by the AK-affected cells, which in turn, become extremely sensitive to light. The skin area is then exposed to the Blue Light Illuminator which destroys the AK cells. The best part about PDT therapy is that it does not require prescription and daily medication.
The next obvious question that comes to mind is what is AK.
Actinic keratosis is a crusty, scaly growth on one's skin caused due to frequent exposure to sunlight or artificial sources of ultraviolet (UV) radiation. AK is considered as a pre-cancer situation because if left untreated, it can potentially develop into a type of skin cancer known as squamous cell carcinoma (SCC). It appears on body areas which frequently get exposed to sunlight such as bald scalp, neck, shoulders, ears, face, forearm, and legs. The currently available options to treat AK are surgical removal procedures, topical drugs, and PDT.
Approval, launch, and initial hurdles
The patent of Aminolevulinic acid in Levulan is with Parteq Innovations and Dusa has in-licensed these patents for the development of the product. For marketing and distribution, Dusa exclusively out-licensed Levulan Kerastick to Schering AG in 1999 for an upfront payment of $23.7mn and equity investment of $6.3mn. Levulan Kerastick was approved by the USFDA in December 1999 and launched by Schering in September 2000.
Schering had estimated Levulan to become a $50-100mn drug in the third year of launch. Schering had priced Levulan at $80/Kerastick and estimated sales of 0.6-1.2mn units. Levulan, however, was received poorly under Schering. The drug reported sales of $0.9mn in 2000. In 2001, sales dropped 43% yoy to $0.5mn. The slide continued in 2002 when sales of Levulan dropped 38% yoy to $0.3mn.
The poor sales performance led to negative operating leverage for Dusa as it had to compensate $1.4mn in expenses to a third-party manufacturer in the early days.
Termination of agreement with Schering and performance under Dusa
As Levulan fared poorly in the early days, Schering and Dusa terminated the distribution agreement in 2003. Dusa also decided to distribute the products on its own and commenced its own marketing in January 2003. The results were visible in the first year of operations under Dusa. Levulan sales increased from $0.3mn in 2002 to $1mn in 2003. In 2003, the company also launched the drug in Canada. In September 2003, Dusa received USFDA approval to market blue light therapy BLU-U without Levulan PDT for some other dermatological conditions. In 2005, the company increased the average selling price of BLU-U from $4,368 in 2004 to $6,542 in 2005.
While Dusa had its own facility approvals for Levulan and Blu-U, it kept Sochinaz SA in Switzerland as a third-party manufacturer. This led to increase in its gross margins to ~65% in 2004 and ~85% in 2010. The sales kept increasing owing to the price hikes and increasing volumes as well as launches in Korea and Latin America in 2007. Between 2003 and 2006, Levulan’s sales grew at 100% CAGR.
In 2007, however, Levulan sales grew by merely 14% yoy due to the warning letter for its marketing material. Between 2007 and 2012, Levulan sales grew at ~22% CAGR to cross the $50mn/year mark. In December 2012, Sun Pharma acquired Dusa Pharma. Dusa fit the bill for Sun Pharma as Sun was interested in buying a branded product business.
Under Sun Pharma, Dusa flourished further and Levulan sales crossed $100mn in FY15. In FY17, Dusa’s sales in the US touched $137mn only to drop 32% yoy in FY18 to $94mn. The decline was due to the launch of a similar drug by its competitor.
Competition and litigation issues
In May 2016, Biofrontera, a German Biopharma Company, received USFDA approval for a similar product, Ameluz. Since its approval, Ameluz has taken market share away from Levulan. It should be noted that Ameluz is priced at a ~33% discount to Levulan. Biofrontera also raised $12mn in February 2018 to fund the marketing and sales of Ameluz in the US.
Biofrontera claims better efficacy of Ameluz over Dusa’s Levulan and has already launched this product in Germany, Spain, and the UK under its own front end. Ameluz also received the J-Code which helps the reimburse for the drug, thus leading to a consistent increase in its US sales. We estimate US sales of Ameluz in M9CY18 to be ~$10mn.
Dusa, in March 2018, filed a lawsuit against Biofrontera AG and its subsidiaries at the District Court of Massachusetts alleging the company for the infringement of its patents nos. 9,723,991 and 8,216,289. In July 2018, Dusa again alleged
Biofrontera to misappropriate confidential and trade secret information from Dusa. In December 2018, Dusa received a preliminary injunctive (PI) relief
from the US courts; this, however, is not the end of this litigation.
While Ameluz's threat is slightly cooled off for now, Levulan patents are due to expire in June 2019. This drug is one of the top contributing drugs for Sun Pharma and the loss of Levulan's sales to competitors would significantly impact Sun Pharma's US sales and consolidated profitability.
It would be interesting to see how the Levulan vs. Ameluz battle unfolds. Sun Pharma’s shareholders must pay close attention to this.