Allergan (NYSE:AGN) told investors this week it plans to sell off its sagging obesity intervention business by the middle of the year, ending the aesthetics giant’s involvement with the Lap-Band.
Sales in the division haven’t grown since 2009 for Irvine, Calif.-based Allergan, despite a major regulatory win in 2011 when the FDA approved the Lap-Band device for patients with a body mass index of at least 35, or a BMI greater than or equal to 30 along with at least one co-morbid condition, such as diabetes or hypertension.
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At the time, analysts predicted that the watchdog agency’s decision would be a major boost. Collins Stewart analyst Louise Chen estimated that sales could increase some 51% to $390 million by 2016, or $500 million if the economy improved. That obviously didn’t happen. In 2012, the division posted an anemic $160 million in sales, down 43.6% from 2011, which were down 16% from 2010.
Given the success of several of Allergan’s other business units and the company’s push to maintain double-digit sales growth every year, ditching the unit became a no-brainer – albeit a surprising one given the statistics on U.S. obesity. With an estimated 36% of American adultscategorized as obese, and projections that nearly ½ of all Americans could hit that level by 2030, why did the Lap-Band have failed to take off?
We asked Allergan CEO David Pyott just that last December at the MassDevice Big 100 West in Newport Beach. Here’s what he told us:
"Clearly when one looks back, there’s a huge need for the product," Pyott told us. "So it comes down to the issue of reimbursement. Even if you’re so fortunate to have health insurance, which isn’t everybody until the Affordable Care Act comes into place, you’re looking at a co-pay of between $2,500 to $4,500 [for the procedure]. For people in those circumstances, that’s a massive outlay. What we learned was, in the pre-recession days, we thought about ⅓ of that business was what we call ‘cash pay.’ With hindsight, it was actually ‘credit-card pay,’ and you can imagine what happened when the recession occurred. That funding source has gone close to zero post-2009 recession."
But it was the structure of the health insurance industry that ultimately forced Allergan out of the obesity game, Pyott added.
"We did a fairly long-range study over a 5-year period, measuring the cost of obesity (35 BMI and up) and looked at groups with Type II diabetes, which is the most common co-morbidity. We looked at it, not from a quality-of-life standpoint, which is normal for a pharmaceutical or device company, but from pure economics. For investing a cost of $21,000 for the operation, which is more than the average, … the payback was 2.3 years. You’d think going to health insurance companies around the United States and telling them that they would be signing up to say, ‘How do I get my enrollees onto this?’
" Any CEO, if I told them, ‘Here, I have an investment with a very probability of a 2.3 year return,’ assuming you have cash or an ability to borrow the cash, most would be signing up. Why does it not work? Because of the other disturbing factor of commercial insurance, which is called ‘insurance churn.’ The average time for any enrollee to be in 1 managed care program in the U.S. is less than 3 years. So, the fear of the insurer is, ‘if I pay for hypothetically yours, it’s the guy over here who gets all the benefit on the back end.’ So, very sad but too difficult to crack."