Biotech Values

[Rocky3]

From Morgan Stanley report on GILD today. I already posted this on Twitter but thought I would try to copy it here - mostly for its comments about MRK being "rational," clearly implying that ABBV was not with its price cuts.

One of the bear fears is that Gilead and AbbVie's rebates have started the slippery slop of a price war that is a
race to the bottom. Specifically, the fear is that the 46% gross-to-net just represents a starting point of additional
downside instead of the end of the road for downside. We believe it actually represents a reasonable base where
further decline may be limited.
Merck Data Not a Slam Dunk
Inherent in our base case, and we suspect among consensus, is that Merck will enter the US HCV market in 2016
with a relatively comparable regimen to Harvoni (i.e., no ribavirin necessary and 12 weeks duration with a single
pill). This reduces our Gilead market share and increases our base rebates by ~10 points. However, we highlight
below why the Merck data could be less robust than Harvoni when it is presented at EASL in April.
Gilead Signals It Will Defend Share - In the complex world of game theory, we believe Gilead offers
the best signal it can to competitors with its recent pricing action. It will defend share at all costs. Thus,
for the next competitor, it should be clear that even if they offer substantial discounts Gilead will match
and the competitor will not gain sig. incremental share. Thus, the competitor is better off matching
price and competing in the market place to gain share. With a rational competitor this preserves the
market price.
Rational Merck - Merck needs HCV less than AbbVie, thus we believe Merck will be more rational.
Further, Merck has been able to watch both AbbVie and Gilead compete in the market place. We believe
Merck clearly understands that if it tried to lower price it will not only hurt Gilead, but will also hurt
itself because it will not achieve enough incremental market share to offset sizeable price declines.
Long-term durability with price - With a rational Merck, what Gilead may have done is just
accelerate the lowering of price from a 3 year endeavor to a 4-6 month endeavor. Thus, flat price again
represents a source of upside (we model another ~15 points of price decline over the next two years in
our base case).