Relative Price & Value of pre-Phase III Pipelines for the 22 Largest Drug & Biotech Companies – Updated View

Written March 18th, 2015 by

Using patent data we estimate the amount and quality of innovation in companies’ pre-phase III (aka ‘hidden’ pipelines), and then determine whether companies’ share prices accurately reflect what’s in these hidden pipelines.  Since inception (November 2012), companies that screen as >= 20% undervalued have outperformed their peers by 1.5x (cap wtd) to 1.7x (equally wtd)

We believe that the duration and consistency of our performance validates our approach – the odds against achieving this level of performance through random selection of candidate stocks are roughly 44,000:1

Because of large misvaluations in hidden pipelines, shares of VRTX, BMY, SNY, and ROCHE all appear at least 20 percent undervalued. Conversely shares of ALXN, BIIB, CELG, GILD, NVO, REGN, and SHPG all appear at least 20 percent overvalued

For more information on our pipeline valuation methods, and for related R&D productivity metrics covering the 23 largest publicly-traded companies (by R&D spending) please visit

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

AMGN, REGN, SNY: Bull Case for PCSK9’s; COGS a Major Advantage for SNY/REGN

Written March 17th, 2015 by

We see peak US sales potential for PCSK9’s in the $5.5B to $8.5B range before outcomes data, and in the $9.6B to $15B range after outcomes data are available. By comparison, consensus expects combined 5th year global sales (our estimates are US-only) for the two products of just $4.2B

We suspect our US forecast calls for much higher patient volumes at much lower average net prices (we expect net US pricing of only $252 – $340 per month). Our conservative pricing estimate has much to do with formulary managers’ considerable leverage over the class: there will be no outcomes data at launch; the patient population can be finely segmented by risks and LDL-C’s, enabling restrictions; the PCSK9’s are likely to be on specialty tiers with higher co-pays; and, a large percentage (+/- 51%) of treatment candidates are on Medicare or Medicaid (where co-pay cards cannot be used, and average rebates run much higher)

Because the PCSK9’s are monoclonals their COGS will be relatively high, especially for chronic use products in our predicted net pricing range. Most patients on SNY/REGN’s alirocumab have reached their LDL-C goal on 75mg every 2 weeks (1,950mg annually); all patients on AMGN’s evolocumab require at least 140mg every 2 weeks (3,640mg annually) and those using the 420mg monthly dose will consume 5,460mg annually

At the lowest COGS we know of for a monoclonal (Erbitux, $0.30/mg), annual COGS for the lower alirocumab dose would be $576 and for the higher dose $1,161; annual COGS for the lower evolocumab dose would be $1,075 and for the higher dose $1,612. At our assumed net pricing, this would equal a COGS/sales ratio ranging from 14% to 38% for alirocumab, and from 26% to 53% for evolocumab

This affords SNY/REGN a distinct advantage. Because most patients will reach goal on the starter 75mg every 2 week regimen, SNY/REGN’s ‘workhorse’ dose is the one with the lower ($576 rough estimate) COGS. By comparison, AMGN’s starting dose – 140mg every 2 weeks – presumably has nearly twice the COGS ($1,075 rough estimate). SNY/REGN can sell their starting dose for $500/year ($42/month) less than AMGN’s, and still earn the same gross profits as AMGN

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

ABBV/PCYC: Imbruvica’s US Pricing Has Room to Grow

Written March 12th, 2015 by

Imbruvica’s only dosage form is a 140mg capsule, with a US price of $101.88. Most indications for which Imbruvica is currently approved are dosed with 3 capsules daily (420mg), for an annual treatment cost of $111,559

The average price for single-source treatments for acute life-threatening conditions approved in the US since 2003 is $154,472. And, the annual cost for the closest alternative (Rituxan/Zydelig) to Imbruvica in its largest approved indication (refractory CLL) is $144,808

Imbruvica is under development for a broad range of leukemia / lymphoma indications, and has potential in solid tumors and auto-immune conditions also. Many of the indications in development use Imbruvica at a dose of 4 capsules daily (560mg), for an annual cost of $148,745

$145,000 annually is a feasible price point for Imbruvica in both its approved and pending indications; however with only a single dosage form Imbruvica must either be underpriced in its 3 capsule / day indications (as we believe it presently is) to be fairly priced in its 4 capsule / day indications, or fairly priced in the former and over-priced in the latter

We have no immediate means of knowing whether Imbruvica can be manufactured in a more concentrated form, so to be conservative we assume the only way to produce a higher milligram dose is to use a larger capsule. The current 140mg dose uses the standard size ‘0’ capsule which is already quite large – 22mm or 7/8” in length. The largest feasible capsule size is the next higher (‘00’), which has 1.4x the volume of the size ‘0’, making a 196mg dose (140mg x 1.4) feasible. Any smaller dose is of course also feasible

Imbruvica’s pricing can be optimized ($145,000 for both the 3 and 4 capsule per day regimens) by raising the price of the current 140mg capsule from $101.88 to $132, and launching either a smaller 112mg capsule at $79, or a larger 187mg capsule at $132. The 420mg per day indications would continue to use 3 of the 140mg capsules; and the 560mg per day indications could use either 5 of the 112mg capsules, or 3 of the 187mg capsules

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

WBA, CVS, RAD: There Are Simply Too Many Pharmacies & Now it Starts to Matter

Written February 25th, 2015 by

Retail prescription margin growth has outpaced CPI since 1990, drug pricing since at least 2001, and any other major US retail setting’s gross margin growth since at least 2004

It’s not because we lack enough pharmacies, it’s because traditional drug benefit plans (which cover 92% of Rx’s) mean customers face the same Rx costs no matter which store they choose. Under narrow (or preferred) networks this all changes – pharmacies willing to dispense at lower margins can, for the first time, gain traffic

Now that retail dispensing margins are real money, engineering drug benefits to reduce dispensing margins makes great sense. We believe narrow retail networks can save +/-7% over all-inclusive networks. If this doesn’t sound like a lot, bear in mind that all the effort PBMs and HMOs put into managing formularies and negotiating drug rebates yields an average savings of about 8%

Using the federal standards for pharmacy proximity (90% of beneficiaries within 2 miles of a pharmacy for urban, within 5 miles for suburban, and within 15 miles for rural), we estimate that 34% of US retail pharmacies could be closed before these proximity standards are no longer met

As retail networks narrow, chains (WBA, CVS, RAD) can profitably dispense at lower margins than independents, so the long trend of independent closures is likely to continue. However mass merchants and supermarkets presumably are willing to dispense at even lower margins than the chains. Chains get 63-69% of sales from prescriptions, mass merchants and supermarkets get only 6-10% – meaning mass merchants and supermarkets can cut dispensing costs and make it up on front store traffic, but the pharmacy chains cannot

The average distance from a WBA pharmacy to a mass merchant or supermarket with a licensed pharmacy is only 1.3 miles; for CVS it’s 1.9 miles, and for RAD 2.5 miles. Within the applicable minimum proximity radius (2 mi urban, 5 mi suburban, 15 mi rural) the average WBA and/or CVS pharmacy will find 9.2 mass merchants and/or supermarkets with pharmacies; the average RAD pharmacy will find 7.9

RAD’s earnings are most reactive to falling dispensing margins; a 1 percent change in pharmacy gross margin percentage would, all else equal, have lowered RAD’s 2014 OPEX by 24.1%. For WBA the fall in OPEX would have been 11.5%, for CVS 5.3%

Consensus expectations for near term (2015/16) gross margins fell in the wake of late-summer warnings by WBA and RAD about the effects of generic acquisition costs and narrowing networks. However consensus now expects gross margins to be stable over the mid- to longer-term, which fails to account for the likelihood that narrow retail pharmacy networks will gather more beneficiaries with each passing year, creating a steady source of mounting gross margin pressure

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

SSR Health New Product Approval Portfolios & Supporting Data Update

Written February 17th, 2015 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’ portfolio 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 annualized returns (75% v. 37%) with comparable standard deviation of annual returns (17% v. 15%) to an ‘innovator index’ of nearly the entire universe of biopharmaceutical stocks. The 5% and 20% pre-PDUFA portfolios have outperformed by even greater margins as compared to the innovator index (98% and 119% v. 37%), though at higher s.d. of returns (34% and 53% v. 15%)

We expect US real pricing power for pharmaceuticals to fade, increasing 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)

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

Motive & Opportunity: The Convoluted Tale of Generic Price Inflation

Written February 9th, 2015 by

Since early 2013, prices for generics sold in the US at retail have risen more than 40% on a sales weighted basis

Three-quarters of this inflation was driven by straightforward median reversion: a host of products with very low prices simply raised their prices to within range of the broader market’s median. Before pricing actions these products had a median price of $0.29 as compared to $0.77 for products whose prices did not inflate; after the pricing actions these products’ median price rose to $0.72

Other than their very low starting prices, there is nothing remarkable about the median-reverting products – there are just as many manufacturers per median-reverting product as there are for products whose prices did not inflate; and the median-reverting products were no more likely to have experienced supply disruptions

The remaining one-quarter of inflation was driven by very large price increases on products that had average prices to begin with, but that also had very low average sales per product, and fewer manufacturers per product, as compared to products whose prices did not inflate

We believe the surge of inflation occurred for two simple reasons: generic manufacturers, under pressure from stalling sales growth and stagnant ROA’s, very badly needed it; and, the generic manufacturers’ main customers – drug wholesalers – chose to go along

The generic companies’ sales growth is at its lowest level in 14 years; ROA’s have been below 3 percent since before the financial crisis and have stayed there, despite a recovery in SP500 ROA’s to nearly 5 percent

From drug wholesalers’ perspective, their margins expanded on the products whose prices median-reverted. On the subset of products where sufficient data are available (representing about 75% of the median reverting products’ sales) wholesalers’ costs grew 25% but their selling prices grew 39%

Growth in prices paid to generic manufacturers is likely to stall once the industry’s aggregate fundamentals improve. There’s already evidence this is occurring, as pricing gains have substantially expanded both gross and operating margins, pointing to a corresponding recovery in ROA’s. Major pending US generic launches (e.g. Nexium, Abilify) may accelerate a fundamental recovery

Wholesalers’ margin gains are likely to be fleeting, as excess buying margin is passed along to retail clients in the form of lower prices

The ongoing shift to National Average Drug Acquisition Cost (NADAC) is a wildcard – very low cost generics could be highly profitable to wholesalers under the outgoing Average Wholesale Price (AWP) benchmark; under NADAC very low priced generics are likely to be money losers. It follows that drug wholesalers may welcome continued price inflation of very low cost generics, regardless of whether generic manufacturers remain as desperately in need of price gains as they have been recently

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

Why ABBV is Still a Value

Written February 5th, 2015 by

GILD’s disclosure of an expected 46% average Harvoni discount for 2015 reduces our net pricing expectations for ABBV’s Viekira Pak to roughly $42,000 per regimen, down from roughly $60,000

Despite this, we still see ABBV as a value, simply because it’s capable of substantially exceeding EPS expectations, even at lower Viekira Pak net pricing

An obvious point worth emphasizing is the obvious relationship between price and volume – which very much applies to the HCV market, given the fact that payors have restricted access to sicker patients. ESRX removed any restrictions beyond having to be RNA positive, significantly expanding the potential patient pool; given ESRX’s share of commercial patients we believe this pressures other payors to act similarly. Viekira Pak is exclusive to ESRX

Setting aside the price / volume argument, we would stress that consensus underestimates the mid- to longer-term EPS potential of Viekira Pak, and that the share price reflects skepticism that even these low estimates will be met

Consensus – before being lowered to reflect GILD’s news –  implied Viekira Pak would add +/- $0.50 EPS annually over the 2015 – 2018 period, for a cumulative EPS contribution of $1.85 across this period

With this $1.85, four-year EPS gain as a back drop, we believe Viekira Pak sales to US patients who are already diagnosed will drive EPS gains of $1.60 and $2.28, and that US patients who are currently actively infected (aka RNA positive) but undiagnosed will contribute further EPS gains of $0.78 to $1.04, for cumulative EPS from US demand of $2.38 to $3.32 – well above the $1.85 implied by consensus, before even considering ex-US demand

The most recent major generation of HCV therapy (pegylated interferons) generated fully 74% of global sales in markets outside the US. For various reasons we expect US demand for the current generation agents to be more on the order of a third of worldwide demand, but the basic point is still obvious – US demand alone is more than sufficient to exceed consensus expectations, and US demand is but a third of global demand

Despite the exceedingly conservative nature of consensus, the market views the marginal EPS from Viekira Pak with great skepticism – ABBV trades at a 25% discount to peers on out-year EPS estimates, the same discount the shares carried before Viekira Pak estimates had made any contribution to overall ABBV consensus

On a positive note unrelated to pricing, MRK announced on Wednesday that the FDA would rescind the breakthrough therapy designation for its HCV regimen. At a minimum this pushes the MRK approval to 2016, and raises the question of whether the MRK regimen compares favorably to either Harvoni or Viekira Pak – both of which received breakthrough designations

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

The Bull Case for SNY’s Diabetes Franchise – Update

Written January 23rd, 2015 by

Consensus expectations for SNY’s basal insulins (Lantus/Toujeo) appear too low. Expectations fell 28% after SNY warned last October that US pricing had weakened, and have fallen to the point that consensus now expects 2017 sales to be lower than 2014 sales

This seemingly ignores the facts that in the US (66% of global Lantus sales) unit demand for basal insulins is growing at 10%, Lantus’ unit share of the basal insulin market is growing; and, both SNY and its key competitor (Levemir/NVO) increased list prices of their products by 11.9% in the month following the warning

In short, consensus expectations for Lantus (and the follow on product Toujeo) have failed to adjust for recent volume, share, and pricing trends, all of which point to substantially higher than consensus sales

As an entirely separate matter, we believe SNY’s pre-phase 3 pipeline is undervalued – so much so that SNY’s share price would have to increase by roughly 45% in order to more accurately reflect the apparent amount of innovation in the pre-phase 3 pipeline. To be clear, this is on an all-else-equal basis; i.e. we would argue SNY is roughly 45% undervalued even if consensus figures for Lantus and Toujeo were correct, though we don’t believe they are

Taken together, we see two powerful – and independent – reasons to believe SNY is substantially undervalued

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

The Outlook for Brand Drug Pricing Part 1: The Traditional Large-Cap Pharmaco’s

Written January 20th, 2015 by

US net pricing gains explain more than 100 percent of US revenue growth for the large-caps as a whole; making net price growth crucial not only to future growth but also to dividends, a signal feature of valuations

Net pricing gains are at risk, particularly from rising co-pays, which manufacturers subsidize with co-pay cards that reduce patients’ out-of-pocket costs at the pharmacy counter. As co-pays rise so do the subsidies offered by manufacturers’ co-pay cards, in a self-reinforcing cycle; however the co-pay subsidies reduce net price

To bring the essential moving parts into view, we provide data on list price growth, rebate / discount growth, and resulting net price growth for each company, and also for each company’s key brands

Of the large-caps, Roche is in the strongest position with regards to US pricing. Roche’s US revenues depend very little on US net pricing gains, and the company arguably could raise its net US prices more rapidly than it is doing

AZN, GSK, LLY, and MRK are in the weakest positions with regards to US pricing. GSK is likely to see further US net price erosion for Advair, which accounts for about 32 percent of GSK’s US Rx revenue. This spills over to AZN, whose Advair competitor Symbicort will likely be caught up in the broader category’s emerging price competition. Of LLY’s key brands only Cialis has remaining US net pricing growth; however Cialis loses patent protection in just 2 years. MRK’s net pricing trend is negative, MRK’s average discounts exceed the peer average, and these discounts are growing more rapidly than the peer average

PFE is a unique middle case – it has a number of brands that offer continued US net pricing gains; however the company is pushing net price growth faster than the peer average, and is more reliant on these net pricing gains than other companies. There are significant risks that PFE’s net pricing gains cannot continue to exceed the peer average pace

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



Flu Effects on 4Q14 Earnings

Written January 9th, 2015 by

The 2014 – ’15 flu season is slightly worse than 2013 – ’14 overall; we estimate flu-related hospital spending will be up roughly 30%

Notably, most of the additional hospitalizations are occurring among the elderly (65+), in fact hospitalization rates for persons aged 18-64 are actually down versus last season. This implies that any negative earnings effects should be isolated to insurers with significant Medicare exposure

However despite the concentration of increased flu demand among the elderly; absolute growth in total Medicare claims should be modest. We estimate flu increased hospital spending for Medicare beneficiaries by roughly $972M in 4Q14 which, on the estimated ‘base’ spending of $63B in that period, represents an increase of only 1.5%

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

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