In the case of Hep C, the potentially large market opportunity (>$15 bn in peak annual sales by our estimates) would appear to be squarely in the sights of market leader GILD and to a lesser extent ABBV, both of which may receive FDA approval by the end of 2014. However, we see room for follow-on Hep C therapies and believe MRK is well positioned to enter the market with a competitive all oral Hep C regimen, albeit slightly late. Our analysis of Hep C market evolution suggests that MRK could offer a differentiated profile based on preliminary results of phase 2 studies. While we note GILD and ABBV both have next generation Hep C regimens with potential advantages in development behind MRK, keypoints of differentiation in favor of MRK may include dosing, pill burden, broad coverage of genotypes, efficacy and potentially price. We view pricing as an interesting competitive dynamic because MRK pioneered the use of oral protease inhibitors for Hep C with Victrelis in 2011 and has successfully used price to its advantage. With the recent public uproar over Hep C pricing, we would anticipate some level of price competition once there are multiple players in the oral Hep C market and the high degree of price sensitivity amongst payors could work in MRK’s favor as a late entrant. Our $725 mn 2020E sales estimate for MK- 5172/MK-8742 is roughly in line with consensus providing room for upside post-EASL as it assumes just 5% share of the total Hep C market.
Exhibit 2: Our analysis of Hep C market evolution suggests room for innovation creating opportunity for late entrants Based on preliminary phase 2 data, MRK may offer a differentiated profile Company Treatment Regimen ribavirin Peg-interferon Pill Burden Duration Genotypes Naïve Cure Rate Exp. Cure Rate Single Agent Price Total Price MRK Victrelis Yes Yes 4 pills tid 24 to 44 wks 1 72% to 79% 63% to 66% $49,000 $74,000 VRTX/JNJ Incivek/Incivo Yes Yes 2 pills bid 12 wks 1 63% to 66% 59% to 66% $66,000 $89,000 GILD Sovaldi Yes Yes 1 pill qd 12, 24 wks 1, 2, 3, 4 ~70% to 90% ~70% to 90% $84,000 $109,000 GILD Sovaldi/ledipasvir G1 only No 1 pill qd 8, 12 wks 1, 2, 3, 4 93% to 98% 94% to 99% n/a n/a ABBV ABT450r/267/333 Yes* No 3 plus 1 (bid) 12 wks 1, 4 96% to 99% 96% to 100% n/a n/a MRK MK-5172 and MK-8742 No No 1 pill qd 8, 12 wks 1, 2, 3, 4, 5, 6 96% to 100% n/a n/a n/a Ideal Target No No 1 pill qd n/a 1, 2, 3, 4, 5, 6 100% 100% n/a n/a
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