If you check out my portfolio you will notice one company Aralez Pharma with a return of -70%. The management of the company grossly underestimated the competition & the effort required to change patient behavior. Couple of factors got me interested in the business:
Strong management – Company is led by a seasoned CEO who has in his career sold 4 public companies & in the process created tremendous value for the shareholders
Simple product – The product that the company was betting on was simple to understand. It was a drug called Yosprala – a combination of two already approved drugs, Aspirin & Omeprazole. It was targeted at heart patients which develop stomach ulcers as a side effect of taking Aspirin every day. The selling point of this drug was that it will improve patient compliance. Due to the side effect some patients discontinue taking Aspirin which can be potentially life threatening and now instead of taking two pills they only have to take one
The company hired a research firm to conduct market survey, targeted primarily at health care physicians & Cardiologists to understand if they would be willing to prescribe Yosprala. The research result was positive and the company conservatively estimated that it will be able to gain single digit market share resulting in peak sales of ~$200 Million. After getting FDA approval, Yosprala was launched in the middle of 2016 and it didn’t perform well. Doctors were prescribing the drug but patients weren’t buying it. Patients rejected the drug due to its price, they didn’t feel that the convenience of taking 1 pill instead of two was worth the cost. Needless to say the business didn’t grow as projected and the stock took a hit.
As an investor what did I do wrong?
I did the breakeven analysis (which I have explained in a different post) to figure out the value of the business and the price looked attractive. The mistake that I committed was that I didn’t factor in the risk of competition. Yosprala got beaten by its cheaper alternative. I should have done more research to understand the cost difference between the two options. The success of the drug was also dependent on patients changing their behavior and I should have factored this risk as well. By nature humans are resistant to change and in order to change need strong incentives. In the case of Yosprala patients didn’t have a strong incentive to change, a cheaper alternative was available.
Conclusion
When analyzing a business it is of utmost importance to understand the competitive landscape of the company. A prime example of how competition can ruin established businesses is playing out in front of us in the retail industry. Amazon has figured out a better mouse trap and the entire retail industry from Apparel goods to Sporting goods is feeling its heat.
