Biotech Values

[Rocky3]

Re $GILD, $ABBV, $ENTA: From Wells today re the 46% discount. Way too early to know if this is right (and it goes against the normal usage of language), but if it is right, the market is ripe for a huge correction in valuation of all the HCV stocks.

**Recall GILD had recently reported that the gross/net (discount) for their HCV products is expected in 2015 to be 46% --
meaning that for Harvoni, given that Sovaldi is likely discounted less, discounting could be up to 50-55% depending on
each drug's relative contribution to revenues.
**Our understanding now, and something we do not believe may be fully appreciated, is that the 46% blended number
likely refers to a discount per patient, rather than per pill. In other words, patients taking Harvoni for 8 weeks would have
an intrinsic 33% ''discount'' for a course of therapy, so if up to half of GT-1 Harvoni patients ultimately qualify for 8 weeks
of therapy rather than 12, this would itself account for 17% of the 50% ''discount.''
**This would imply that the actual ''per-pill'' Harvoni discount might be closer to 35-40%, and that revenues per U.S.
patient starting on the drug might be incrementally higher.
**Establishing this concept of a discount per patient, rather than per pill, makes sense to us not only because it would
enable GILD to effectively leverage the greater value conferred by a shorter-duration regimen (that ABBV cannot offer),
but would also potentially set GILD up to retain strong per-patient economics even if the regimen is shortened by addition
of a third component such as their PI.
**BOTTOM LINE: Though HCV discounting remains substantial, if indeed the 46% discount already incorporates the
inherently lower cost of the 8-week Harvoni regimen, the actual per-pill discount might be incrementally less -- and
revenues per new patient start incrementally higher -- than anticipated, increasing the likelihood 2015 sales could
meet/beat consensus if prescriptions remain strong. We believe GILD shares overly discount HCV uncertainties.