Attention hepatitis C sufferers: You now have a new treatment option.
Merck joins a growing field
After the closing bell on Thursday, the Food and Drug Administration announced that it had approved Merck's (NYSE:MRK) Zepatier, a once-daily tablet that combines elbasvir and grazoprevir for the treatment of genotypes 1 and 4. Genotype 1 is the most common form of HCV and represents about 70% of all diagnosed cases. In the 12- and 16-week clinical studies that led up to the approval of Zepatier, it demonstrated sustained virologic responses with and without a ribavirin of between 94% and 97% in genotype 1 patients and 97% to 100% in genotype 4 patients.
Gilead's Harvoni has been the dominant therapy among genotype 1 HCV treatments because of its one pill per day administration (which Zepatier can now match). AbbVie's Viekira Pak may require an HCV patient take up to six pills per day, which isn't as convenient. Plus, administration of Viekira Pak may include the need for a ribavirin, which has been shown to cause rashes and anemia in some patients. AbbVie is working on a once-daily formulation for genotype 1 that it anticipates bringing to pharmacy shelves as soon as the second half of 2016.
Through the first nine months of fiscal 2015, Gilead Sciences' Harvoni generated $10.52 billion in global sales, with Sovaldi (Harvoni is a cocktail drug combining Sovaldi and ledipasvir) chipping in another $3.73 billion. Based on these figures, we're looking at the genuine possibility that Gilead raked in $19 billion solely from HCV sales in fiscal 2015.
Merck unveils its secret weapon
How much market share could Merck's Zepatier really manage to pull away from Gilead's Harvoni? The answer to this question really depends on three factors for HCV drug developers: efficacy, treatment timeframe, and price.
In terms of efficacy, Zepatier and Harvoni are quite comparable. I don't see anything that stands out that'll cause physicians to steer patients away from Harvoni and toward Zepatier based on disease clearance.
By a similar token, Zepatier's treatment timeframe doesn't offer a large benefit over Harvoni, but it could gobble up some share based on its 12- and 16-week timeframe for treatment-experienced patients with liver cirrhosis and potentially other complications, such as HIV. The current recommendation for a similar patient with Harvoni would involve a 24-week treatment timeframe.
On price, though, Merck unveiled its secret weapon. With Harvoni selling at a whopping 12-week wholesale cost of $94,500, and Viekira Pak at $83,319 for the same treatment timeframe, Merck chose to price Zepatier at "just" $54,600 for a 12-week treatment -- a remarkable 42% discount to Harvoni. According to The Wall Street Journal, Merck set that price because only a minority of HCV patients have been treated to date. The reason so many haven't, Merck surmises, is because of the high costs of previously available treatments. It's possible that some consumers and physicians will be wooed by this steep discount relative to Harvoni considering the two treatments' similar efficacy and convenience.
Of course, if you dig below the surface, Merck's price advantage could prove illusory. Listed wholesale drug prices are rarely ever paid by patients, and they certainly aren't paid by insurers. Health-benefit providers worked out long-term -- and in some instances, exclusive -- deals for Gilead's and AbbVie's HCV products in exchange for hefty gross-to-net discounts.
Although Gilead Sciences keeps its gross-to-net discounts somewhat of a guarded secret, and gross-to-net isn't the same as just saying a "discount from list price," Foolish biotech guru Brian Orelli reported early last year that Gilead's fiscal 2015 gross-to-net on Harvoni would be about 46%. Translation: Harvoni priced out at an average of just $51,000 per 12-week treatment, assuming these numbers held true through the year. In other words, Merck's lower price tag for Zepatier doesn't really make it a huge bargain compared to Harvoni so much as it potentially removes a lot of the haggling between Merck and insurers from the equation (thereby enabling the drug to get on formularies more quickly). Of course, it's also distinctly possible that $51,000 is Merck's initial salvo, and that Merck will also offer discounts to insurers, thereby preserving its pricing advantage.
Where does Merck fit in?
The big question on the minds of investors is what sort of market share Merck might be able to win. An analyst with investment firm Bernstein believes Merck can carve out about an 11% niche in HCV by 2017, working out to about $2.2 billion in annual sales. Of course, Merck's success will be dependent on the deals it strikes with insurers, and in its ability to penetrate a market currently dominated by Harvoni.
Looking out a little further into the future, what investors should be keeping their eyes on is Merck's once-daily triplet that's currently in clinical testing. The combination of grazoprevir, MK-3682, and MK-8408, which is a new version of elbasvir, demonstrated a cure rate of 91% in genotypes 1 through 3 in just eight weeks in a midstage study reported in November. If Merck can successfully undercut Harvoni's treatment timeframe without a substantial reduction in efficacy, we could see a new market leader in HCV. This triplet, if approved by the FDA, could find its way onto pharmacy shelves by 2018, or perhaps a tad sooner.
The approval of Zepatier was an expected, but still substantial, win for Merck. Considering that it has suffered through four years of declining top-line revenues (compounded by negative currency translations), Zepatier could be the spark that really ignites Merck's turnaround. If you don't have Merck on your radar, perhaps now is the time to add it.