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Hepatitis C Commercial Game Theory

Opinion

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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.

The impact of Regulus on the market is probably the least understood scenario of all the possible futures of the HCV field and is, therefore, worth exploring in more detail. Regulus could … Next Page »

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Peter Kolchinsky is a founding partner and portfolio manager at RA Capital Management, a crossover fund investing in healthcare and life science companies. He received a Bachelor’s degree from Cornell University and a PhD in Virology from Harvard University. As noted above, one or more investment vehicles managed by RA Capital has positions in Achillion and Regulus. Follow @

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17 responses to “Hepatitis C Commercial Game Theory”

  1. Joel L. Zive says:

    As a specialty pharmacist, I have to deal with two barriers before I can dispense these new oral Hep C medications to patients: obtaining a prior authorization from the PBMs and then getting their copays covered. This article gave me a road map of what might lie ahead in terms of pricing. Interesting insights.

    • Edmond C says:

      In light of what has happened since the first shots were fired, what is your reactions to the Hep C Price War where GILD has clearly signaled that it will defend its market share. Did GILD over-react? Was ABBV too aggressive in pursuing additional market share post Express Scripts. Really enjoyed your article. Go Big Red. This comment is for the author)

  2. The Blue Rose says:

    Why did you not mention your large investment in Benitec Biopharma (BTEBY)?

    Surely their potential single shot regime TT-034 (that requires no adjunct or backup) fits into your theory. It is only months behind RGLS at the clinic (and ddRNAi has a better safety record).

    • Author says:

      For same reason JNJ’s nuke (from alios) did not get included… no human data yet. Once there are some data, it becomes worth speculating on what might be.

      • Joey R says:

        Nice article. I hope to see another article outlining your thoughts if Benitec’s TT-034 demonstrates efficacy with the one shot cure. That would surely upend this whole article.

        • Author says:

          Indeed, that would be interesting; I’m looking forward to the data. However, the game probably doesn’t change as much as you would think. In the game of “good enough cure”, being the best isn’t as relevant as the Hippocratic Oath would suggest. Price would still matter. Once a company like Abbvie gets into the “good enough” zone, there is little risk of being cut out of the competition entirely because, if push comes to shove and you have nothing to lose, you just drop price until payers can’t ignore you. That being said, once you get low enough, price cuts below that may not matter. I don’t know what “low enough” is, however. If a one-shot cure cost $20k and everyone wanted it, leaving all companies even with all-oral 6-week regimens with zero market share, would Express Scripts give one of them exclusive formulary status if they dropped their price to just $10k? What if one-shot were $10k and an all-oral dropped price to $5k? That’s billions in savings. Ultimately, everyone still gets cured and taking one pill a day for 6 weeks is not that inconvenient. So even a company with a one-shot cure would have to play by the rules of “tacit collusion” and merely compete for some market share but leave enough for the other merely “good enough” players to feel satisfied so they don’t cut price further. So the article doesn’t get upended… it merely gets extended along the same lines.

          However, in emerging healthcare markets where complying with a 6-week regimen is hard, a one-shot cure would be very important; that’s a very low price, high volume game, totally different from US/EU/Japan markets we’re used to thinking about. That’s a whole other article.

          • Brama says:

            And don’t forget that this one shot cure may potentially have continuous efficacy for 150 days or more. I do believe that one shot and walk away tilts the hand it benitec’s favor, but even more so is that if it works the way they are thinking, it will cover most, if not all, genotypes.

          • Author says:

            I believe that you are referring to the idea that an AAV vector should continue to express the shRNA payload indefinitely (Factor VII has been shown to express for years) and therefore may protect patients from being reinfected. That is a cool feature, even if reinfection happens at a very low rate, and would need to be proven in studies, but by the time they are nearing the market, I think we’ll have data on the rate of reinfection among patients who had been cured with standard regimens. I think that many of the patients cured in the past with interferon-based regimens were relatively responsible patients who were compliant with fairly onerous treatments, possibly not as prone to HCV reinfection as some at-risk patients (IV drug users who can’t be bothered to use clean needles, customers of tattoo parlors that reuse ink). However, new oral regimens might be used to treat more of the at-risk patients, and so maybe we’ll see a higher reinfection rate. In any case, this was an article that touched on most of the drugs for which we have clinical data. There will be opportunities to discuss new agents down the road when they yield data.

          • Brama says:

            Plus the fact that it is supposed to be pan-geno in this one shot….no one treatment can make that claim…..yet.

          • The Blue Rose says:

            Thanks for your answer regarding TT-034 and Benitec.

          • Joey R says:

            Thank you for your response. Yes I guess it wouldn’t upend the whole article or basis of it. It would just add another equation to the mix, albeit a very interesting one for sure.

    • Brama says:

      Why reveal the Ace in their hands? If Benitec blows the lid off Hep C, guess who has an edge over investment timing. Additionally, TT-034 will also confirm the whole platform tech. Shhh. Don’t tell anyone. ;-)

  3. Markus says:

    In the light of a) improving “good enough” therapies or achieving the “good enough” and b) triple or quad therapies to improve barriers to resistance:

    Do you see a commercial value in an DAA with only 1-2 log 10 reduction, but with a different resistance profile than other agents on the market/in P2/P3 studies and achieving this reduction relatively fast (within the first two days)?

    (edited: data inserted/corrected)

  4. Author says:

    Such an agent would be of questionable value in the hands of a standalone company, but if safe and incorporated into, for example, BMS’ regimen, might help BMS make its 12-week regimen into a more competitive 8-week regimen. But adding a fourth drug to a triple therapy is not straightforward and would cause delays that I doubt would justify the trouble. So my guess is that the big players would not bother with such a drug. 1-2 logs might just be too little too late.

  5. shesaidsomething says:

    May-be 94K to cure Hepatitis C is the real issue (and don’t give that crap about drug development, 10 years, 1 billion….blah, blah, blah). I get the economics but the slick breakdown is just so disgusting. I can’t stomach it.

  6. Dayne Grimshaw says:

    have you finished your accumulation of blt.ax now peter? time to let it fly mate.

  7. Dayne Grimshaw says:

    you are one greedy motherfucker