Healthcare

ABBV (and ENTA): The Corvette(s) to GILD’s Ferrari

Written September 2nd, 2014 by

We believe consensus incorrectly views GILD’s pending hepatitis C (HCV) regimen as having consistently greater efficacy than ABBV’s pending regimen; in this note we compare pivotal trial results for the two regimens side by side, and show that the ABBV alternative offers comparable efficacy

The GILD regimen is of 8 (rather than 12) week duration in some but not all type 1 patients; the ABBV regimen is of 12 week duration in all patients. Patients are required to use ribavirin (RBV) more often on ABBV than on GILD regimens. Both regimens are highly tolerable; there were no withdrawals for adverse events (AE’s) in GILD’s three main trials; across ABBV’s five main trials, two saw zero AE related withdrawals, one trial saw a 0.5% rate, one a 1.0% rate, and one a 1.9% rate

The GILD regimen is one pill once daily; the ABBV regimen is no more than three pills twice daily

On net, the ABBV regimen offers the same efficacy, at the cost of greater treatment duration and/or the addition of RBV-associated tolerability issues. Despite this narrow relative disadvantage vs. GILD, in an absolute sense the ABBV regimen is both sufficiently brief and highly tolerable – making it a viable alternative, especially for cost-sensitive payors

In this note we detail the efficacy and tolerability gap between PegIntron and Pegasys, the two predominant pegylated interferons (IFNs) that have been the mainstay of HCV therapy for more than a decade. We show that despite being substantially less effective and less tolerable than Pegasys, that PegIntron has captured 34% of global pegylated IFN sales to date

The ABBV HCV regimens are far more closely matched to the GILD HCV regimens than PegIntron was to Pegasys; accordingly barring the effect of additional competitive entrants, we would expect the ABBV HCV regimens to capture global share on par with that captured by PegIntron (i.e. more than 30%)

Allowing for the effect of competitive entrants (the first with at least comparable efficacy to ABBV comes from BMY in 2016, the second with potentially comparable efficacy from MRK in 2017), we’re confident ABBV can capture at least 20% of global sales. Current consensus appears to credit ABBV with less than 10% share of global sales

One component (ABT-450) of the ABBV regimen is licensed from ENTA; we believe cumulative royalties to ENTA should range between $900M and $3.5B. ENTA’s current enterprise value is roughly $665M

For our full research notes, please visit our published research site

Relative Price & Value of pre-Phase III Pipelines for the 23 Largest Drug & Biotech Companies – Updated View

Written August 26th, 2014 by

Using patent data, we estimate the relative ‘true economic’ value of companies’ pre-phase III (aka ‘hidden’ pipelines), and then compare these estimates to the apparent market capitalization of these same pipelines. Since inception (November of 2012), our portfolios of stocks whose hidden pipeline misvaluations imply ≥20% relative share price gains has appreciated at 1.5x the rate of a comparator portfolio containing all 22 companies analyzed (equal-weighted 1.5x; cap-weighted 1.5x)

Capital markets misvalue pre-phase III (i.e. ‘hidden’) pipelines for an obvious reason: they’re hidden, at least to conventional methods of valuation. Careful analysis of patent data gives us an opportunity to see what’s hidden, and to determine whether it’s fairly valued

On average, roughly 35 percent of the largest drug and biotech (by market cap) companies’ share prices are linked to these companies’ ‘hidden pipelines’, i.e. to projects in phase II and earlier stages of development

The percent of share price explained by a company’s hidden pipeline ranges from 5 to 69 percent. The apparent economic value of the innovation in these companies’ hidden pipelines spans a similarly broad range, but in many cases the capitalization of a company’s pipeline will be low versus peers even though its pipeline contains more innovation than peers, or vice versa

Because of large misvaluations in hidden pipelines, shares of VRTX, BMY, and SNY all appear at least 20 percent undervalued. Conversely shares of ALXN, BIIB, CELG, GILD, NVO, and REGN all appear at least 20 percent overvalued (SHPG also appears >20 percent overvalued, but will be dropped from the peer group going forward, as it is rolled into ABBV)

For more information on this, and related R&D productivity metrics covering the 22 largest publicly-traded companies (by R&D spending) please visit hiddenpipeline.com

For our full research notes, please visit our published research site

SSR Health New Product Approval Portfolios & Supporting Data Update

Written August 12th, 2014 by

Drug, biotech, and research-based spec pharma stocks tend to outperform their peers in the year or so before and after regulatory actions (‘PDUFA’ dates) on major new products, with a large portion of total risks being concentrated in the days immediately preceding and following the PDUFA date

Since November of 2011 we’ve run model portfolios consisting solely of names with pending (i.e. ‘pre-PDUFA’) or recent (i.e. ‘post-PDUFA) major-product regulatory actions, respectively. Within each broader ‘pre-‘ and ‘post-PDUFA’ portfolios are three sub-portfolios that differ only in terms of how large the new product is as a percentage of the company’s total sales forecast. E.g. the ‘1% pre-PDUFA’ portfolio consists of all names with pending regulatory decisions on products that account for at least 1% of the company’s total sales forecast, and so on for the ‘5%’ and ‘20%’ pre- and post-PDUFA portfolios. To moderate risks, all portfolios follow rules to limit long positions in the days immediately before and after regulatory actions

Since inception, the 1% pre-PDUFA portfolio has produced greater returns (54% v. 35%) at a lower standard deviation of returns (12% v. 14%) than an ‘innovator index’ of all companies eligible for inclusion in these portfolios. The 5% pre-PDUFA portfolio has outperformed by an even greater margin as compared to the innovator index (70% v. 35%), though at a higher s.d. of returns than the innovator index (26% v. 14%). Over the last 360 days, the 1% and 5% pre-PDUFA portfolios have returned 54% and 88%, respectively, versus 31% for the innovator index

We expect US real pricing power for pharmaceuticals to fade, which will increase the importance of new product flow to relative performance. Thus screening for names with attractively priced new product flow is an appropriate first step to stock selection across the drug, biotech, and spec pharma sub-sectors. We offer two related tools, the first being these portfolios of names with major pending or recent regulatory actions (published monthly); the second being our Hidden Pipeline series of reports that identify undervalued phase 2 and earlier pipelines (published quarterly)

Please note: regularly included in this series of reports are detailed tables of all (major or not) pending new drug applications (NDAs) and biologics license applications (BLAs) for all US-listed drug, biotech, and research-based spec pharma companies; and, detailed tables of all phase 3 products under active development by these companies 

For our full research notes, please visit our published research site

CORRECTION: GILD v. ABBV: An In-Depth Review of Global Sales Prospects for Current-Generation Hepatitis C Treatments

Written August 4th, 2014 by

We believe consensus estimates for global HCV sales are reasonable; however we believe the share of consensus allocated to GILD’s regimens (77%) is a best-case scenario; and that the share of global consensus attributed to ABBV’s pending HCV franchise is far too low

Consensus calls for ABBV’s current-generation HCV therapies, due for US approval on 12/22/14, to capture just 6 pct of the global market, yielding $7.6B (roughly 10 pct of ABBV consensus sales). In contrast, we expect the ABBV regimen to capture at least 20 pct, yielding at least $17B. We see the ABBV v. GILD comparison as very similar to the PEG-Intron v. Pegasys competition, in which PEG-Intron captured nearly a third of global demand

A key factor in our above consensus sales forecast for ABBV is that its regimen is a highly legitimate alternative to GILD’s. Even though GILD’s new regimens (100% response, 8-12 week treatment duration) are better than ABBV’s (93-96% response, 12 week duration), ABBV’s regimen is an outstanding alternative for first line treatment, especially if it is available for less than GILD’s regimens. We’re aware ABBV has signaled it does not intend to compete on (list) price; however we believe they have no practical alternative other than to compete on net (of rebates) pricing

 

CORRECTION: This note corrects an error in our calculation of global HCV sales potential in our note published August 4th, 2013. We previously stated that global HCV demand for current generation agents would be less than consensus expects; having corrected the underlying error our estimate of global HCV demand is now on par with consensus. Importantly, we had also argued that consensus forecasts for GILD’s HCV regimens were 20% to 30% too high; having corrected the underlying error our forecasts for GILD’s HCV regimens are now roughly on par with consensus (our # is $58B v. $64B consensus, though we believe consensus’ assumption for GILD’s share of global cumulative sales (77%) is at the outer edge of reasonable estimates. Our conclusion that ABBV is undervalued (both in the absolute and relative to GILD) remains unchanged; in fact because our expectations for global sales have risen, the dollar value of ABBV’s expected >=20% share also has risen, strengthening our conviction that ABBV’s HCV treatments are undervalued (we expect >= $17B v. consensus of just $7.6B)

The underlying error in our original note was a miscalculation of WW sales potential. We applied the expected ROW:US sales ratio to expected US sales, and incorrectly stated the product as expected WW sales, as opposed to expected ROW sales. The error is corrected in updated versions of Exhibits 10, 11, 12 and 15 on pages 11, 12 & 14. Changes to these exhibits are highlighted in red

 

For our full research notes, please visit our published research site

SSR Index of Current-Quarter Healthcare Demand Growth: Final 2Q14 Estimates

Written July 28th, 2014 by

We expect 4.1% (nominal) y/y growth in US health services demand during 2Q14, the product of 2.6% growth in demand intensity and 1.5% growth in price. Following the BEA’s nearly unprecedented downward revision of its 1Q14 demand estimate, our projection of intensity is sharply lower than our initial 2Q14 estimate

The surprise demand spike reported by BEA for 1Q14 has been completely revised away in the agency’s final reported figures. We speculated recently that BEA had erred in using its judgmental trend to call for an immediate ACA-driven uptick in services consumption. Final reported numbers – which rely on more rigorous survey data than the preliminary numbers – showed that our final 1Q14 estimate was a mere 10bp off, and that there was actually a sequential dip in consumption from 4Q13. In short, whether because of late enrollment, plan features or other reasons, the ACA does not appear to have materially impacted demand in the first 3 months of 2014

Independent of our quarterly growth rate models, we handicap the odds of a trend break, i.e. a significant acceleration or deceleration in demand. The trend-break model indicates that sequential acceleration in demand intensity during 2Q14 (from 1Q14) is only slightly more likely than a deceleration (66%); i.e., quarter on quarter movement is very nearly a toss-up

Pricing growth remains anemic, although we expect observed y/y price dynamics to improve substantially this quarter as sequester-related cuts to Medicare reimbursement annualize out of the base period observations. In spite of this (mathematical) improvement in government pricing, commercial pricing is weakening

We continue to believe intensity of demand will grow as ACA enrollment gains play through and as employment improves. However, consistent with our observations throughout 2014, and with the BEA’s about face on the impact of the ACA in 1Q14, the timing of demand growth remains unclear. We still favor healthcare sub-sectors that are: 1) positively levered to gains in US per-capita intensity; and 2) have stable pricing, such as Non-Rx Consumables (e.g. BDX, BCR, COV, CFN, OMI)

For our full research notes, please visit our published research site

SSR Health New Product Approval Portfolios & Supporting Data Update

Written July 10th, 2014 by

Drug, biotech, and research-based spec pharma stocks tend to outperform their peers in the year or so before and after regulatory actions (‘PDUFA’ dates) on major new products, with a large portion of total risks being concentrated in the days immediately preceding and following the PDUFA date

Since November of 2011 we’ve run model portfolios consisting solely of names with pending (i.e. ‘pre-PDUFA’) or recent (i.e. ‘post-PDUFA) major-product regulatory actions, respectively. Within each broader ‘pre-‘ and ‘post-PDUFA’ portfolios are three sub-portfolios that differ only in terms of how large the new product is as a percentage of the company’s total sales forecast. E.g. the ‘1% pre-PDUFA’ portfolio consists of all names with pending regulatory decisions on products that account for at least 1% of the company’s total sales forecast, and so on for the ‘5%’ and ‘20%’ pre- and post-PDUFA portfolios. To moderate risks, all portfolios follow rules to limit long positions in the days immediately before and after regulatory actions

Since inception, the 1% pre-PDUFA portfolio has produced greater returns (56% v. 39%) at a lower standard deviation of returns (12% v. 14%) than an ‘innovator index’ of all companies eligible for inclusion in these portfolios. The 5% pre-PDUFA portfolio has outperformed by an even greater margin as compared to the innovator index (70% v. 39%), though at a higher s.d. of returns than the innovator index (26% v. 14%)

We expect US real pricing power for pharmaceuticals to fade, which will increase the importance of new product flow to relative performance. Thus screening for names with attractively priced new product flow is an appropriate first step to stock selection across the drug, biotech, and spec pharma sub-sectors. We offer two related tools, the first being these portfolios of names with major pending or recent regulatory actions (published monthly); the second being our Hidden Pipeline series of reports that identify undervalued phase 2 and earlier pipelines (published quarterly)

Please note: regularly included in this series of reports are detailed tables of all (major or not) pending new drug applications (NDAs) and biologics license applications (BLAs) for all US-listed drug, biotech, and research-based spec pharma companies; and, detailed tables of all phase 3 products under active development by these companies

For our full research notes, please visit our published research site

The Bull Case for Specialty Drug Pricing

Written July 7th, 2014 by

Average prices for traditional drugs (e.g. drugs for common chronic conditions, and for relatively non-serious acute conditions) grow rapidly because manufacturers steadily inflate existing drug prices over time. In contrast, average prices for specialty drugs (e.g. for less common debilitating and/or life-threatening conditions) have risen because new products (e.g. Sovaldi) tend to be launched at substantial premiums to the products they replace. Unlike traditional drugs, once launched the prices of specialty drugs tend not to rapidly inflate (though exceptions plainly exist)

Manufacturers’ ability to inflate traditional drugs’ (net) pricing faces serious threats: Medicare eventually is likely to make low-income Part D beneficiaries’ drug spending subject to Medicaid pricing rules, which eliminates any potential for real price gains on these sales (which are 55% of Part D sales, and 18% of total US drug sales).

Commercial payors are likely to shift toward co-insurance and away from fixed dollar co-pays; this too seriously limits manufacturers’ ability to achieve real (net) pricing gains on traditional drugs (because co-insurance makes consumer out-of-pocket costs grow at the rate of drug prices)

Specialty drugs face the prospect of new rebates (but not launch price pressure, see next). Beginning in 2018 – 2019, we believe Medicare is likely to require rebates on sales of higher margin products (e.g. drugs, devices) to beneficiaries in Parts A and B. And, as commercial beneficiaries opt for cheaper plans with more restrictive formularies and higher out-of-pocket cost sharing, this puts commercial formulary managers in the position of demanding rebates even from relatively unique and high-need specialty products

Crucially however, despite the likelihood of paying new rebates over the mid- to longer-term, we see no feasible means by which either public (generally Medicare) or commercial payors will put effective pressure on the launch prices of new specialty products

It bears emphasizing that Medicare has no authority to influence new product prices under current law, and that historic attempts to gain such authority have routinely failed. Under current law Medicare payment is contingent only upon: “… a determination that a service meets a benefit category, is not specifically excluded from coverage, and the item or service is ‘reasonable and necessary.’” And, to the specific question of whether CMS considers cost-effectiveness in determining whether a given product will be covered, they do not: “Cost effectiveness is not a factor CMS considers in making NCDs (national coverage determinations). In other words, the cost of a particular technology is not relevant in the determination of whether the technology improves health outcomes or should be covered for the Medicare population through an NCD.”

Because commercial payors (e.g. PBMs, HMOs) earn relatively predictable percentage margins on the baskets of goods and services they cover, within limits* commercial payors benefit when the ‘given basket’ includes products and services whose starting prices (before negotiations) are as high as possible.A 15% margin on a $10,000 drug obviously is worth more than a 15% margin on a $5,000 drug. The key to (commercial payor) success isn’t making the $10,000 list price drug into a $5,000 list price drug, it’s being able to buy the $10,000 drug for less than its competition

Thus as concerned as we are that traditional drug pricing power (specifically the ability to inflate prices of existing products) will be seriously impaired, we have very little concern that specialty drug pricing power (the ability to launch new products at substantial premia to the products they replace) faces any major threats in the near- to mid-term. New rebates that may be owed on specialty drugs are relatively far off (2018 – 2019 for Medicare), or will only come into place gradually (as a rough estimate, it should take 5 or more years for most commercial beneficiaries to move into cheaper plans where specialty drug rebates are likely to apply)

Our pricing thesis argues for holding companies with pending new product flow, which we systematically identify in our ‘SSR Health New Product Approval Portfolios’, published monthly

For our full research notes, please visit our published research site

SSR Index of Current-Quarter Healthcare Demand Growth: Interim 2Q14 Estimates

Written June 25th, 2014 by

We expect 6.8% (nominal) y/y growth in US health services demand during 2Q14, the product of 5.2% growth in demand intensity and 1.5% growth in price. Our estimate of demand intensity is sharply higher in 2Q14 – reflecting an expectation that Affordable Care Act (ACA) related enrollment gains will increase intensity by approximately 2% – but moderated by 30bps sequentially from the initial 2Q14 estimate

Independent of our quarterly growth rate models, we handicap the odds of a trend break, i.e. a significant acceleration or deceleration in demand. The trend-break model indicates that sequential acceleration in demand during 2Q14 is likely (92%)

Pricing growth remains anemic, although we expect observed y/y price dynamics to improve substantially this quarter as sequester-related cuts to Medicare reimbursement annualize out of the base period observations. In spite of this (mathematical) improvement in government pricing, commercial pricing is weakening

We continue to believe intensity of demand will grow as ACA enrollment gains play through and as employment improves. For this reason, we favor healthcare sub-sectors that are: 1) positively levered to gains in US per-capita intensity; and 2) have stable pricing, such as Non-Rx Consumables (e.g. BDX, BCR, COV, CFN, OMI)

For our full research notes, please visit our published research site

Net HIE Premiums Growing Faster Than Incomes; This is Likely to Accelerate

Written June 24th, 2014 by

The average premium increase thus far proposed by health insurance exchange (HIE) plans for 2015 is 10%; this compares to 4% to 5% expected income growth for subsidy eligible households

We encounter a common misperception that the Affordable Care Act (ACA) keeps households’ net premiums constant as a percent of income. In reality, the first of two health insurance subsidy indexing provisions – ‘regular’ indexing – keeps households’ share of premiums constant, until and unless the second indexing provision (‘additional’ indexing) applies. Thus beginning in 2015 households should expect their net premiums to rise (at least) at the rate of overall premium inflation

Additional indexing applies in 2019 and after if total federal premium (and cost-sharing) subsidies paid exceed 0.504 percent of GDP, as is likely. Additional indexing serves to keep total federal premium and cost-sharing subsidies at or near this percent of GDP, in which case households purchasing subsidized health insurance on the HIEs will see their net premiums grow even faster than the underlying rate of premium inflation

Most current beneficiaries will have enrolled at a point in time at which their exchange could not offer a great deal of information regarding the nature of the coverage they were purchasing – other than the price. As beneficiaries have begun to gain experience with their coverage, we believe many will be disappointed by features such as narrow networks and high levels of cost-sharing. In effect, we believe beneficiaries’ (and potential beneficiaries’) assessment of the value of coverage may be falling, just as the cost of coverage (as a percent of incomes) begins rising. This feeds our conviction that the HIEs are subject to adverse selection pressures that will force policy changes, and leads us to believe that enrollment growth in 2015 may be limited

For the HIEs to succeed (both in terms of avoiding adverse selection and enrolling sufficient numbers of persons to meaningfully reduce the ranks of the uninsured), we believe at least one or more of the following policy steps will be taken: (re-)allowing greater premium differences based on age, (re-) allowing higher out-of-pocket maximums, reducing the scope of mandatory benefits, increasing subsidies, increasing penalties, and/or forcing the merger of adverse HIE risk pools into larger, better balanced risk pools

For our full research notes, please visit our published research site

Early Look at 2015 HIE Rates: Avg. Increase = 10%

Written June 17th, 2014 by

11 states have disclosed insurers’ proposed rates for plans to be sold on the health insurance exchanges (HIEs) in 2015. The enrollment-weighted average rate increase thus far is 10.0%. These states’ 2014 HIE beneficiaries represent 14.6% of nationwide 2014 HIE enrollment

Although it’s too early in the process to know how 2015 actual rates will shape up nationally, it’s notable that proposed rate inflation outstrips the underlying medical cost trend (+/- 5.4%) in all 11 states except Maine, which suggests insurers are facing greater-than-expected claims costs

If realized rate increases are on par with early figures, growth in net premium costs will easily outpace income growth for subsidy-eligible households, owing to the Affordable Care Act’s (ACA) subsidy indexing provisions. This imbalance would further diminish the value of HIE coverage for younger / healthier enrollees – who are already under-represented on the HIEs – resulting in mounting adverse selection pressures

In this case, HIE-related gains in per-capita demand intensity and hospitals collections are likely to disappoint; and HIE rules and regulation ultimately must be modified by (re-)allowing greater premium differences based on age, (re-)allowing higher out-of-pocket maximums, reducing the scope of mandatory benefits, increasing subsidies, increasing penalties, and/or forcing the merger of adverse HIE risk pools into larger, better balanced risk pools

For our full research notes, please visit our published research site

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