In hindsight: what the AbbVie/Express Scripts deal means?

In December 2014, AbbVie (NYSE: ABBV) kicked off a price war with Gilead Sciences (NASDAQ: GILD) in the hepatitis C market by inking an exclusive deal with Express Scripts (NASDAQ: ESRX), the largest Pharmacy Benefit Manager (PBM) in the U.S.

There are 3 million patients with hepatitis C in the U.S. But it is a prevalence market with no future. As more patients are treated and cured, demand for the drug could drop. These concerns induced AbbVie to gain market share via a price war.

Gilead fought back soon with several similar deals with PBMs and health insurers including CVS Health (NYSE: CVS), Anthem (NYSE: ANTM), Aetna (NYSE:AET), Humana, Harvard Pilgrim, EnvisionRx, UnitedHealth (NYSE: UNH).

It appears that Gilead has won the price war. However, this is a war without winners. Gilead estimates 2015 gross to net adjustments (discounts) at 46% vs. 22% at end 2014. This means Gilead will offer Sovaldi/Harvoni at nearly half of its list price.

Gilead announced total revenues for 2014 were $24.9 billion compared to $11.2 billion for 2013. Hepatitis C drugs, Sovaldi and Harvoni, generated total sales of $12.4 billion in 2014. However, the company’s forecast for 2015 is only $26-27 billion.

All the hepatitis C stocks are down sharply on February 4, 2015 (e.g., GILD-8.2%, ABBV-7.7%, MRK-3.2%, BMY-1.0%, ENTA-8.1%, ACHN-16.9%, RGLS-3.8%). The NASDAQ Biotechnology index slid as much as 3.85% intraday.

The AbbVie/Express Scripts deal might change the entire landscape of drug pricing. Whichever companies offer the deepest discounts and cut exclusive deals with the largest insurers will win the biggest market shares. In other words, insurance companies are in the driver’s seat.

This is just the beginning, and more drugs are not far behind, such as anti-PCSK9, anti-PD1/PDL1, and anti-CD19 CAR-T. Express Scripts CMO Steve Miller told Bloomberg “we look at this as being the first of what will happen in the field of cancer, rheumatoid arthritis and many other of the expensive specialty fields.”

Anti-PCSK9 mAbs, a new class of cholesterol-lowering drugs, like Sanofi (NYSE: SNY)/Regeneron (NASDAQ: REGN)’s alirocumab, Amgen (NASDAQ: AMGN)’s evolocumab and Pfizer (NYSE: PFE)’s bococizumab are most probable to be next. Alirocumab is expected to be priced at $10,000 per year and to generate $3-4 billion in peak sales.

At the JP Morgan Healthcare Conference, Express Scripts CEO George Paz said anti-PCSK9 mAbs are “the short term, and cancer is a long term.” The market for anti-PCSK9 mAbs might not be as big as investors expect, once discounting is taken into account.

Would the price war be good for patients? Undoubtedly, more patients could be treated. In turn, exclusive deals will limit patient’s therapeutic options. The exclusive options offered by insurers might not be optimal. In the case of Gilead/AbbVie, Gilead’s Harvoni is safer and more convenient than AbbVie’s Viekira Pak. However, Express Scripts forced its customers to take Viekira Pak rather than Harvoni.

Investors’ fear is that price controls may stifle innovation. Biotech companies have to rethink whether their new drugs are worth still developing. Drugs with unique safety and efficacy profile will remain safe from the negotiating skills of insurers.

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