The emergence of additional players in the HCV market, like Bristol-Myers Squibb and Merck possibly in 2016 or 2017, will force Gilead and AbbVie to make room for more new entrants. To compete, Bristol and Merck do not need to have the best drugs; they just need to be “good enough” (i.e., well-tolerated, oral dosing for 12 weeks or less, with greater than 90 percent cure rates). Each company’s debut may trigger a single round of discounting to establish the new market share equilibrium, but each party will do its best not to accidentally over-elbow the others into a frenzy of price discounts. Based on what is known about their compounds, Merck’s regimen could be comparable to Gilead’s, requiring only 8 weeks of dosing for most patients, while Bristol’s regimen may be more like AbbVie’s, requiring 12 weeks of dosing. All, though, should fall within the “good enough” spectrum.
Others are coming. Achillion Pharmaceuticals (NASDAQ: ACHN) is a small company with four HCV drugs in clinical development; it is working on a combination regimen that could come to market by 2018, maybe a year behind Merck. Even if all known HCV patients sought treatment today, due to capacity constraints and the large pool of undiagnosed patients, there will still be millions of people who need treatment in 2018. That makes HCV a substantial and long lasting market worth fighting for. And that’s even if treatments are priced at a half, or a third of the cost they are today—especially if, given the deflation expected to occur over the next few years, payers continue to drag their feet on enabling widespread access to treatments.
Therefore, by 2018, barring consolidation among these companies, there will likely be five “good enough” regimens—and potentially more—competing for a slice of a still very large pie. Other companies, notably Johnson & Johnson (NYSE: JNJ), are still working on combination treatments, but may fall short of qualifying for “good enough.” And then there’s Regulus Therapeutics (NASDAQ: RGLS), whose subcutaneously injected antisense drug, RG101, is showing signs in early studies that after giving a patient a single injection, a physician might only need to prescribe 4 or 6 weeks of even moderately effective oral drugs—including those that might not be considered “good enough” on their own—to ensure a very high rate of cure for patients.
Before elaborating on Achillion and Regulus, I’ll pause briefly to disclose that the fund that my colleagues and I manage holds positions in both companies. We built these positions in part because of our conviction in the analysis of the HCV landscape presented here; we could certainly be wrong. While these arguments stand on their own merits and represent my views, if I, as a professional investor, held such views without owning stock in these companies, readers should question my sincerity.
While tacit collusion could potentially keep prices from eroding when there are two, three, and maybe even four players, having five or six players might just bring about a true, chaotic price war. Clearly, Gilead, AbbVie, Bristol, and Merck have the most to lose from Achillion and/or Regulus coming to market; game theory would dictate that the larger companies would just buy out the smaller ones to avoid the risk. Arguably, any other company could achieve a dominant position in the HCV arena by buying both Achillion and Regulus. Their combined market capitalization is currently $2 billion—therefore, paying even a 100 percent premium would cost little more than the $3.85 billion Merck paid for Idenix Pharmaceuticals earlier this year. Wouldn’t it be interesting if a company out of left field like Alexion Pharmaceuticals (NASDAQ: ALXN) acquired Achillion for its Factor D inhibitor to protect its flank in complement disorders, while gaining a highly valuable HCV franchise in the deal?
Ordinarily, a match between an orphan disease company and the HCV market would not make sense, but the qualifications for competing in HCV are both modest and attainable for any company with enough resources and agility; therefore, the list of potential suitors is longer than you would expect.
There is some evidence that many investors and analysts are still operating under the impression that only the best drug can win. On the same day that AbbVie-Express Scripts deal was announced, Achillion released data from its HCV pipeline. Whether the data were good enough for Achillion to be competitive was subsequently debated, with most of the commentary focused on whether Achillion’s nucleotide polymerase inhibitor, or “nuc,” ACH-3422, had the same hallmarks of efficacy and safety as Gilead’s and Merck’s nucs. In a phase I trial, Achillion’s nuc took a few days longer than other nucs to knock down comparable amounts of virus, which some interpreted as an inferior outcome. Achillion’s nuc is just one of four HCV drugs that the company has in the clinic that it plans to combine into an effective regimen. Demanding that Achillion’s nuc tie for first place within its drug class fails to acknowledge the lesson from the AbbVie-Express Scripts deal—the bar for getting to the market and competing on price is having a combination regimen that is “good enough.”
Whether Achillion’s regimen is better than Merck’s or Gilead’s is simply not that important. Achieving a 6-week cure is certainly a nice objective and indeed possible, but to get in the game, Achillion just needs to qualify with a regimen that cures most patients in 8 to 12 weeks, a modest goal by comparison that now looks highly probable. With a valuation that is 99 percent lower than Gilead’s, Achillion could exceed expectations by taking even a modest 10 to 15 percent of the market, which is not unreasonable in a 5-player field.
If Achillion does emerge with a regimen that is better than AbbVie’s and Bristol’s, neither of which have a nuc, then these fourth and fifth place players may become unsatisfied with their market share and think about more price cutting to maintain exclusivity in at least one of the few large formularies. This strategy could spark more rounds of discounting by all players, unleashing a potentially unmitigated price war. By acquiring Achillion for its nuc and NS5A inhibitor (another drug used in HCV regimens), either AbbVie or Bristol could both strengthen its own hand and remove one player from the field, at least partially easing competitive pressure. Interestingly, by adding a nuc to its next-generation regimen, AbbVie could dilute the royalty it pays to Enanta Pharmaceuticals (NASDAQ: ENTA) for a protease inhibitor (in the expanded regimen, the protease inhibitor would represent a third of the combination instead of half, unless it were eliminated altogether); reduced payments to Enanta would partially offset the cost of acquiring Achillion.
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