ABBV: A Reluctant Farewell to the HCV Bull Case

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Richard Evans / Scott Hinds / Ryan Baum

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July 28, 2015

ABBV: A Reluctant Farewell to the HCV Bull Case

  • US HCV prescription demand has begun easing, and is likely to decline. Viekira Pak has maximized its share within the ESRX contract, meaning further share gains can only come from exclusive or preferred deals which don’t yet exist, or from convincing docs who can prescribe either drug to write for Viekira Pak instead of Harvoni
  • We don’t see any real possibility of ABBV gaining major exclusive / preferred formulary deals ahead of next year, by which time MRK will be entering the market with a third alternative that appears slightly inferior to the GILD and ABBV regimens, but which is effective enough to gain share – as long as it’s priced aggressively, as it surely will be
  • Share gains for Viekira Pak on ‘inclusive’ formularies, i.e. where both Harvoni and Viekira Pak are available at similar costs to patients, almost certainly will not occur. Prescribers prefer Harvoni, something no amount of promotion is likely to change
  • Share is stagnating, volumes are easing and soon likely to decline, and a major entrant who will presumably compete on price is due by 1Q16. And as all of this is occurring, in the US Viekira Pak has only a 9 percent share of total prescriptions and an 11 percent share of new prescriptions – well below the 20 percent lower bound of our original estimate
  • We believe ABBV will soon see its peak US HCV sales quarter, if it hasn’t already. On the bright side we do believe ROW sales prospects for the broader HCV market generally are too low; ultimately we expect aggregate ROW sales for the current generation of agents to be more than 2x aggregate US sales. Unfortunately US margins are higher, US sales are more relevant to near term expectations, and a larger percentage of ROW patients carry genotypes other than those (1a, 1b) against which Viekira Pak is effective

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. AMGN, BMY, CELG, GILD, SNY, VRTX); Biopharma companies with pending major product approvals (e.g. ABBV, ALIOF, AMGN, AZN, BDSI, BIIB, CLVS, ENDP, GNMSF, HLUYY, HSP, ICPT, JAZZ, LLY, MACK, MRK, NVS, PTCT, RLYP, RPRX, SHPG, SNY, SRPT, TSRO, UCBJY, ZSPH); SNY on undervalued basal insulin franchise and sales potential for Praluent (alirocumab), in addition to its undervalued pipeline;; RAD as an acquisition target as WBA and CVS seek to defend against narrowing retail networks; CFN, BCR, CNMD and TFX on rising hospital patient volumes; XRAY and PDCO on rising dental patient volumes and rising average dollar values of dental products and services consumed per visit; CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WBA, CVS); Research Tools & Services companies as growth expectations and valuations are too high in an environment of falling biopharma R&D spend (e.g. CRL, Q, ICLR); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE)

ABBV’s share of the US HCV market stalls; volumes likely to decline; competitive entrant due in 1Q16

On its quarterly conference call last Friday, ABBV indicated that it had maximized Viekira Pak share of HCV within its largest exclusive US contract (ESRX), and implied that remaining US growth was reliant on driving share gains within contracts where both Harvoni and Viekira Pak are on formulary. ABBV also conveyed an expectation that US genotype 1 demand would stabilize at around 175,000 to 180,000 patients annually

Given a choice, prescribers will routinely choose Harvoni over Viekira Pak. Thus ABBV’s primary and perhaps only means of gaining share is to negotiate deals, such as the one with ESRX, that fairly compel prescribers to use Viekira Pak instead of Harvoni[1]. We don’t believe Viekira Pak can take share from Harvoni on formularies where both brands are on an equal economic footing, regardless of the amount or quality of advertising

We also very much doubt that US genotype 1 demand has stabilized. More realistically, demand has peaked, and will now begin to steadily decline. We are of course aware of the legions of undiagnosed and un- or under-treated US genotype 1 patients, and over time we’re hopeful that more of these patients will find their way to treatment as formulary restrictions ease. This having been said, it has long been the case that an excess of HCV patients exists, just as it has long been the case that HCV demand follows a boom-and-bust cycle as the supply of diagnosed and willing patients is exhausted far more rapidly than it is replenished by the slow moving masses of undiagnosed and/or diagnosed and unwilling patients

Against this backdrop of market share having stalled at a low point, and probable outright declines in total unit demand (Exhibit 1), we have a pending competitive entry from MRK, who announced today that FDA has granted Priority Review for their HCV genotype 1, 4, 6 regimen grazoprevir/elbasvir

We sorted through efficacy data for the GILD, ABBV, and MRK regimens to find or calculate efficacy rates for various treatment sub-groups consisting largely or exclusively of genotype 1 patients. The data are organized into treatment naïve and treatment experienced subgroups with or without cirrhosis (these groups contain a minority of non-genotype 1 patients for some regimens), and treatment naïve or treatment experienced subgroups with genotypes 1a or 1b (Exhibit 2). Where we found or could calculate 95% confidence intervals for efficacy ranges, these are provided as ‘whiskers’ in the exhibit

To give a sense of which subgroups matter most in terms of demand, about one-third of patients diagnosed with HCV in the US have cirrhosis; and about 60 percent of genotype 1 patients in the US will be type 1a. Of patients who are diagnosed and treated, before the current generation of interferon-free regimens, about half of patients were treatment experienced. As time passes, we suspect substantially fewer than half of patients receiving therapy are treatment experienced, simply because of the high cure rates associated with current regimens. Thus crudely, the Exhibit 2 subgroups most relevant to US demand arguably are the treatment naïve, no cirrhosis and treatment naïve, genotype 1a subgroups

MRK’s regimen appears to be slightly inferior to the GILD and ABBV regimens in these subgroups, and generally on par with the GILD and/or ABBV regimens everywhere else. That said, we believe the MRK regimen’s efficacy is sufficiently close to the GILD and ABBV standards for the regimen to be a valid alternative to GILD and ABBV – provided MRK is willing to sell at a discount to the prevailing price(s). As was the case with ABBV v. GILD, MRK has little choice but to use pricing in an attempt to gain share. As this is all likely to occur in an already very price-sensitive market that by the time of MRK’s US approval (+/- January 2016) is also likely to be in the midst of volume declines, this implies ABBV will very soon see its peak quarter of US HCV sales, if it hasn’t already

The ROW wildcard

ROW sales for the current generation of HCV agents are ultimately, in aggregate, likely to be more than 2x US sales (Exhibit 3). 2Q15 ROW Viekira Pak sales ($158M) beat ABBV’s expectations, suggesting the brand is off to a solid ROW start. Perhaps the main risk to backing down from our ABBV HCV bull case is that the ROW HCV market is simply larger than consensus realizes; however because gross margins are higher in the US market, the US market is changing rapidly (stalled share, volume declines, competitive entry), and because other genotypes against which Viekira Pak is relatively ineffective are more important in the ROW market, we believe a more conservative outlook for Viekira Pak is now appropriate

Looking back

When we first recommended ABBV on the basis of expectations for Viekira Pak in August of 2014, there was only one sell-side forecast for HCV in ABBV consensus, and ABBV’s share price reflected little or no expectation of success in HCV

Viekira Pak is much closer in efficacy and tolerability to Harvoni than Schering-Plough’s Peg-Intron was (or is) to Roche’s Pegasys; yet Peg-Intron ultimately captured 32% of global dollar sales for pegylated interferons

As was the case with Peg-Intron, other than pricing ABBV has little or no means of differentiating Viekira Pak and gaining share; in light of ABBV’s later start (being launched a year after Sovaldi, where Peg-Intron and Pegasys launched at similar times), we felt confident ABBV could capture at least 20 percent global share of the current generation agents

ABBV’s exclusive deal with ESRX was (and is) a good one – particularly because the price ABBV offered ESRX was contingent on ESRX removing restrictions on who qualified for HCV therapy, a move that had the potential to greatly expand the number of eligible patients. Unfortunately in the immediate wake of the ABBV/ESRX agreement, we believe GILD erred by matching the ABBV/ESRX pricing without also insisting that payers receiving these Harvoni discounts cover all patients who are RNA positive. As a result, the selling prices in the US HCV market are down by nearly 40%, without a widespread easing of restrictions on patient eligibility

Ultimately restrictions on who’s eligible for HCV treatment in the US will fall away, but at a much lower price point than was originally necessary. From the perspective of the ABBV bull case, this happens not only at a lower price, but in a market with a third competitor, and stagnant to falling volumes

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  1. Or, at the very minimum deals that make Viekira Pak much less expensive to patients than Harvoni
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