Why ABBV is Still a Value

Richard

GILD’s disclosure of an expected 46% average Harvoni discount for 2015 reduces our net pricing expectations for ABBV’s Viekira Pak to roughly $42,000 per regimen, down from roughly $60,000

Despite this, we still see ABBV as a value, simply because it’s capable of substantially exceeding EPS expectations, even at lower Viekira Pak net pricing

An obvious point worth emphasizing is the obvious relationship between price and volume – which very much applies to the HCV market, given the fact that payors have restricted access to sicker patients. ESRX removed any restrictions beyond having to be RNA positive, significantly expanding the potential patient pool; given ESRX’s share of commercial patients we believe this pressures other payors to act similarly. Viekira Pak is exclusive to ESRX

Setting aside the price / volume argument, we would stress that consensus underestimates the mid- to longer-term EPS potential of Viekira Pak, and that the share price reflects skepticism that even these low estimates will be met

Consensus – before being lowered to reflect GILD’s news –  implied Viekira Pak would add +/- $0.50 EPS annually over the 2015 – 2018 period, for a cumulative EPS contribution of $1.85 across this period

With this $1.85, four-year EPS gain as a back drop, we believe Viekira Pak sales to US patients who are already diagnosed will drive EPS gains of $1.60 and $2.28, and that US patients who are currently actively infected (aka RNA positive) but undiagnosed will contribute further EPS gains of $0.78 to $1.04, for cumulative EPS from US demand of $2.38 to $3.32 – well above the $1.85 implied by consensus, before even considering ex-US demand

The most recent major generation of HCV therapy (pegylated interferons) generated fully 74% of global sales in markets outside the US. For various reasons we expect US demand for the current generation agents to be more on the order of a third of worldwide demand, but the basic point is still obvious – US demand alone is more than sufficient to exceed consensus expectations, and US demand is but a third of global demand

Despite the exceedingly conservative nature of consensus, the market views the marginal EPS from Viekira Pak with great skepticism – ABBV trades at a 25% discount to peers on out-year EPS estimates, the same discount the shares carried before Viekira Pak estimates had made any contribution to overall ABBV consensus

On a positive note unrelated to pricing, MRK announced on Wednesday that the FDA would rescind the breakthrough therapy designation for its HCV regimen. At a minimum this pushes the MRK approval to 2016, and raises the question of whether the MRK regimen compares favorably to either Harvoni or Viekira Pak – both of which received breakthrough designations

For our full research notes, please visit our published research site

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