Navigating Pharma’s “Gold Rush” Into Hepatitis C Print E-mail
By Brian Wilson - Lead Contributor   
Monday, 16 June 2014 00:33

After watching two record-breaking drug launches into the Hepatitis C drug market, Merck (MRK) made an incredibly aggressive $3.85 B acquisition bid last week that generated a lot of excitement on Wall Street. Although the acquired company - Idenix Pharmaceuticals (IDIX) – is only a mid-stage company with a history of multiple drug failures, it’s clear that Merck sees enough long-term commercial potential for the Hep C space to justify its actions.

The two key drugs added to Merck’s pipeline through the acquisition are Samatasvir (an NS5A inhibitor) and IDX21437 (a Uridine nucleotide analog).

Although Gilead Sciences’ (GILD) recently-launched Hep C drug Sovaldi (sofosbuvir) may consume the majority of the Hep C market by the time a competitor can arrive, Merck’s logic makes a lot more sense when you see Hepatitis C from a global perspective. The United States only has ~2% of the world’s Hep C patients, and it is unlikely that Sovaldi will expand much into ex-US markets given its current pricing.

In the United States, Gilead is able to charge $84,000 for a typical 12-week regimen of Sovaldi (at $1,000 per pill) because of its efficacy. Since many Hep C patients are on Medicaid or other forms of government-sponsored health insurance programs, reimbursement for Sovaldi has not impeded its progress into the patient population. In a country like India, where healthcare costs are significantly lower, Gilead would maximize sales by launching a renamed version of Sovaldi at a ~$3,000-4,000 price point.

Because it isn’t cost effective to focus on foreign markets (given the remaining potential in the US market) it seems unlikely that Gilead will divert its attention to foreign Hep C patient populations that have less money to spend on the drug. Gilead is in a great position to maximize revenues from insured patients in the US (and to a lesser extent the EU), and there are still hundreds of thousands of targetable patients who have not yet taken Sovaldi.

It would take some time for Gilead to move to foreign markets in full force, and I believe that Merck is very interested in treating the millions of foreign patients who would only be able to afford cheaper Hep C drugs. While margins are significantly lower on inexpensive drugs, we believe that Merck could still generate hundreds of millions in Hep C from Samatasvir or IDX21437 by partnering with local distributors in emerging markets.

We also believe that Merck’s newly acquired drugs will be used in combination with Sovaldi against Hepatitis C in the United States, given that the planned drug combination trials go well. This gives Merck the ability to grow with Sovaldi into the high-margin US Hep C market until the market is depleted.

Quick notes on the disease:

Hepatitis C is a disease that is present in about 3 million Americans, and a whopping 170 million people worldwide. Because Hep C can be completely asymptomatic, the majority of people carrying the virus don’t know about it. Because the virus continues to spread in developing countries, incidence should remain stubbornly high despite an expected drop of incidence in developed countries.

Because the disease is still the leading root cause of liver transplantation in the United States, the eradication of the Hepatitis C Virus remains a top priority for the medical community. Most people in the US with the disease are baby boomers, and screening efforts have been very successful at identifying thousands of patients who didn’t know they carried the virus.

Although Sovaldi is very expensive in the United States, we believe that the serious nature of the disease and the oustanding efficacy of the drug will keep the $84,000 price tag safe and reimburseable for quite some time. No current antiviral has the sheer potency of Sovaldi against Hepatitis C patients with genotype 1 – the most common form of the disease.

The bottom line:

We believe that the Merck acquisition of Idenix was a play on the global Hepatitis C drug market, which is big enough to justify much of the hype that Wall Street is giving to the sector. We also believe that Gilead shares have already priced in the performance of Sovaldi in the United States. There is limited upside potential for GILD from Sovaldi alone.

Merck’s recent acquisition also points to a new general theme that biotech investors should pay attention to: “big pharma acquisitions based on commercial potential in developing markets.”




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