December 16, 2013

Hep C Price War? Abbvie Vs. Gilead

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Dec 16 2013, 06:08  |  about: ABBV, GILD, includes: ESRX

Peter Geschek

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The new hepatitis C pills may become some of the biggest pharmaceutical sellers ever.

Gilead's (GILD) Sovaldi (generically known as sofosbuvir) was approved on December 6 by the FDA to treat certain types of hepatitis C infection without the need for co-administration of interferon. Most patients will be treated with the $1,000-a-day drug for 12 weeks, resulting in a total list price of $84,000.

An interview given by an executive of Express Scripts (ESRX) created a stir in the industry.

Express Scripts' chief medical officer, Steve Miller, told Bloomberg that the convenience of Sovaldi's one-pill-a-day regimen won't necessarily justify the $84,000 price tag for a 12-week regimen, meaning his company may approve Abbvie's (ABBV) regimen instead of Sovaldi if Abbvie's drug is priced lower.

Express Scripts' is the biggest U.S. drug benefits manager, whose decisions affect about 100 million patients. The company filled 1.5 billion drug prescriptions in 2013, or 38 percent of the total prescriptions in the U.S. Due to that leverage it has a considerable influence on drug pricing, but that influence is not without limitations.

ISI Group analyst Mark Schoenebaum commented for his clients:

A big price differential would likely be necessary to block GILD's regimen. In a two-player market (before other competitors reach the market), whether ABBV would be willing to take a large price cut is not clear. Thus, the larger risk to price could be pushed out until 2017 when other competitors are able to reach the market.

The pent-up demand for Sovaldi, coupled with its steep price, is expected to push sales to an unprecedented $2 billion in its first year on the market. One analyst, going out on a limb, predicts that Sovaldi could actually hit $4.5 billion next year, or more than $1 billion per quarter.

Separately, AbbVie released a new round of data from its Phase 3 program, showing an excellent 96 percent sustained response rate among patients with genotype 1, which is the most common genotype of the virus. The new results make Abbvie near equal to Gilead in the Hep C race.

Revolution in Hep C treatment

According to Gilead, Sovaldi can be used in combination with ribavirin, an older antiviral pill, for patients with genotypes 2 and 3 infections, which account for about 28 percent of U.S. patients infected with the virus.

For patients with genotype 1, which accounts for about 70 percent of U.S. infections, the new drug must still be used with both interferon and ribavirin, although it can be considered for use in patients with genotype 1 infections who cannot take interferon. Patients with the much rarer genotype 4 infections will also be treated with a three-drug combination.

Gilead's Sovaldi is the first in a new wave of Hep C treatments that promise better cure rates and a shorter treatment course. AbbVie is not far behind Gilead. It is developing a treatment of four pills to be taken daily. In addition to protease inhibition, the regimen includes an NS5A inhibitor in the agent ABT-267 and a non-nucleoside NS5B inhibitor in ABT-333.

Abbvie found that in the study called Sapphire-1 after 12 weeks of treatment with three of AbbVie's drug candidates plus standard oral drug ribavirin, 96 percent of the patients showed a sustained viral response.

The patients in the study all had genotype 1 of the virus, the most common type, have not been treated before and do not have cirrhosis of the liver, which afflicts patients with more advanced hepatitis. This means that the patient group is probably the most responsive of all the patients in AbbVie's six Phase 3 trials.

AbbVie also have announced results of the Sapphire-II trial in patients who had already failed to achieve a cure on the mainstay treatment of interferon and ribavirin. In those genotype 1 patients, 96 percent were virus-free 12 weeks after concluding a 12-week treatment regimen of ABT-333, ABT-267, ritonavir-boosted ABT-450 and ribavirin.

Four other trials in Abbott's Phase 3 program are yet to read out, Pearl II, III and IV, and Turquoise-II.

A cure rate of 90 percent is now considered the minimum any regimen needs to achieve to be competitive in the new anti-virals market.

Abbvie has claimed that its main goal is to cure patients as completely as possible and that means to lift their SVR (sustained viral response) as high as possible. For that reason the company considers all components of its combination vital.

The race is on. In important trials of patients with the virus' difficult-to-treat genotype 1 AbbVie's regimen is proving to be more or less equal to Gilead' Sovaldi, achieving near-universal cure rates.

The trial results potentially position AbbVie to beat Gilead as first to launch a labeled interferon-free combination for these patients, the largest chronically infected population.

Price war

Express Scripts and others may have a problem denying treatment with Sovaldi since it is the only new Hep C antiviral to show effectiveness in genotypes 2 and 3. And the price in dispute is not much out of line with what is available now: a combination of currently marketed protease inhibitors Inicivek or Victrelis with interferon and ribavirin already costs $80,000-100,000.

Schoenebaum and other analysts argue in defense of Gilead that while competition for Hep C genotype 1 patients is intense, Gilead is years ahead of other companies treating genotype 2 and 3 patients. Express Scripts would have a hard time, at least for the near term, to explain denial of Gilead's regimen for genotype 2 and 3 patients who constitute about 20 percent of hepatitis C patients in the U.S.

There are many and varied differences between the competing drugs.

GILD's regimen requires less pills and includes a nuc which has a higher barrier of resistance. ABBV's regimen includes ritonavir which may interact with other drugs patients may be taking. Also, GILD's regimen that combines Sovaldi with ledipasvir (an NS5a inhibitor) and perhaps ribavirin, may potentially shorten the treatment period from 12 weeks to 8 weeks.

These pluses and minuses may make pitting the two companies against each other more difficult.

Huge market

The Hep C market is bigger than HIV.

The prize each competitor in the race hopes to win is huge, a share of $20 billion or more. There is tremendous pent-up demand for oral therapies that work faster against Hep C without using interferon.

According to Gilead's estimates there are about 4.1 million U.S. patients and another 2.8 million people living with the disease in the European Union. The company says less than half of those patients have been diagnosed and less than 10 percent have been treated.

Hepatitis C, transmitted through blood-to-blood contact, can take decades to cause the permanent scarring of the liver known as cirrhosis and has no vaccine.

People who got blood transfusions before 1992 are at risk because the blood supply wasn't screened for the virus before then. It can also be transmitted through sharing drug needles, unsterilized tattoos and, sometimes, unprotected sex. Because many people don't know they're infected, the CDC recommended last year that everyone born between 1945 and 1965 get a blood test for hepatitis C.

The consequences could be staggering. Predictive models suggest a two-fold increase in HCV-related deaths with direct medical costs exceeding $6.7 billion between 2010 and 2019 and, without intervention, a four-fold rise in the incidence of end-stage liver disease related to hepatitis C within the next 20 years.

Express Scripts

After the initial excitement created by Miller's comments, Express Scripts has tried to play down their significance. But the company is not above cutting off highly effective medications if they believe the price is too high, so the threat is not an idle one.

Express Scripts National Preferred Formulary for 2014 includes a list of 44 treatments and supplies that will not be covered. Patients will be required to choose alternatives, which are listed alongside the newly excluded products.

Among the excluded drugs are Pfizer's (PFE) rheumatoid arthritis drug Xeljanz, Johnson & Johnson's (JNJ) psoriasis treatment Stelara, and GlaxoSmithKline's (GSK) new respiratory drug Breo Ellipta. Also, Novo Nordisk's diabetes treatment Victoza will no longer have a place on the list. The decision to replace Victoza with AstraZeneca (AZN) and Bristol-Myers Squibb's (BMY) Bydureon franchise caused some consternation, given that Victoza is widely perceived as a superior product.

The move is part of a larger trend among payers, which are increasingly reluctant to pay for treatments that are new and more expensive, but that, in their view, are not considered clinical breakthroughs. CVS Caremark (CVS), another benefit manager, blocked 34 treatments last year for cost reasons, but most of them were not big sellers.

Drugmakers also have a fight on their hand with foreign governments that have tough cost-effectiveness rules like the U.K. and Germany.

Will Gilead submit to pressure and lower its prices?

Not likely. Gilead, in its many years in the HIV drug business, has been constantly attacked for its high prices and rarely if ever budged. Abbvie could be a different story in this situation.

What happens next

Gilead plans to file for FDA approval of an all-oral regimen for genotype 1 patients in the first half of next year.

The EU's Committee for Medicinal Products for Human Use recommended approval for Sovaldi, following an accelerated review process after the drug performed well in clinical trials. If all goes well, Gilead said the drug could be launched in Europe during the first quarter of 2014.

In the meantime companies including Bristol-Myers Squibb , Boehringer Ingelheim and others are spending millions to develop new hepatitis C treatments.

Investors' summary

Abbvie's worldwide sales were $4.7 billion in the third quarter, up 3.3 percent year-over-year. Sales increased in the quarter despite the decline in TriCor sales due to the loss of exclusivity.

Sales growth was driven by the continued strength of Humira. Global Humira sales increased 19.1 percent to $2.77 billion in the third quarter. The total for the first 9 months of 2013 was $7.6 billion. Humira now accounts for almost 60 percent of Abbvie's sales, illustrating AbbVie's growing reliance on a product that will lose U.S. patent protection in late 2016.

Many analysts, though, expect sales of Humira to keep growing after its patent expires because it may take many years for generic drugmakers to develop and win approvals for complex "biosimilar" forms of the biotech drug.

Morgan Stanley analyst David Risinger predicts Humira's annual sales will jump another 30 percent, to $13 billion, by 2016.

Third-quarter diluted earnings per share were $0.60 on a GAAP basis. Abbvie badly needs a winner in hepatitis C or anything else to balance its sources of income. In Hep C, Abbvie is admittedly is a little slow behind Gilead with its FDA submissions.

But the company reminds investors that Humira, a TNF (anti-tumor necrosis factor-alpha) antibody was the third TNF, behind competitors, to reach the market and it is now the world's biggest selling drug. Timing sometimes is secondary when measured against a drug's superior quality and special features, Abbvie management believes.

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