MARKET ANALYSIS - Unprecedented Uptake of Sovaldi & Tecfidera Paves the Way for New Optimism in Pharma

INTRODUCTION

Pharmaceutical companies are under more scrutiny than ever regarding the quality of therapies and, concurrently, the return on investment they deliver to shareholders. To this end, many large cap pharma companies continue to reassemble their businesses in favor of greater transparency and operating efficiency.

We have seen two firms, Gilead Sciences and Biogen Idec, both typically seen as being in the biotech mold, achieve astronomical success with their respective launches of Sovaldi (sofosbuvir) and Tecfidera (dimethyl fumarate) in 2013, with both new therapies recording uptake at a level never before seen in the industry.

A successful drug launch is pivotal in the corporate evolution of most innovative drug companies, allowing them to sustain growth momentum, or, as is more commonplace in the age of the blockbuster patent expiration, replenish existing revenues at risk from lower-cost equivalents. As witnessed with recent biotech success stories Alexion and Regeneron, a new drug launch also has the capacity to redefine a company, and, in the case of Gilead’s and Biogen’s latest offerings, successful innovation is rapidly propelling these firms to the realms of Big Pharma.

Indeed, while both Sovaldi and Tecfidera were hotly anticipated by investors, interim sales have exceeded expectation, driving their valuations up even further. In what will be the first full year on the market for Sovaldi and Tecfidera, analyst consensus had initially predicted sales of $4.5 billion and $2.4 billion in 2014, respectively, but both are on course to shatter these already optimistic expectations.

PROVE THAT EITHER EFFICACY OR SAFETY CAN WIN THE BATTLE

Against a backdrop of megamerger activity, Gilead and Biogen have been able to revel in their success in relative silence. The numbers they are posting are anything but quiet however, asking the question: what is driving this unprecedented growth?

Gilead’s total revenues for the first 6 months of 2014 were up over 110% year-on-year, from $5.3 billion in 1H 2013 to $11.5 billion in 1H 2014, due principally to the record uptake of Sovaldi since its approval toward the end of 2013. While Gilead’s revenues have increased substantially, its major operating cost lines have risen disproportionately slowly, leading to significant operating margin gains. The returns from a high-value asset such as Sovaldi, which is relatively inexpensive to make, are clear from Gilead’s Cost of Goods Sold (COGS) margin, which has been cut in half. Its Selling, General, and Administrative Expenses (SG&A) margin has also decreased significantly, despite increased commercial costs associated with the roll-out of Sovaldi. Having already been a clear leader on this metric across the sector in 2013, Gilead is on course to post a record operating margin of more than 60% in 2014, well above the 25.4% Big Pharma average.

Biogen also paints an impressive picture, albeit less prominently than Gilead, though its lead growth driver Tecfidera was launched at the end of Q1 2013, markedly earlier than Sovaldi. Nonetheless, in 1H 2014, Biogen reported total revenue growth of 45%, up from $3.1 billion in 1H 2013 to $4.6 billion in 1H 2014. Again, Biogen’s growth can be attributed almost entirely to the success of Tecfidera. Like Gilead, Biogen boasts some of the best margins in the sector, and this looks set to continue further through 2014, with its Q2 2014 operating  margin surpassing the 40% mark. Biogen’s COGS, SG&A, and Research and  Development (R&D) margins have all declined, despite rising in absolute dollar terms. This is again indicative of their success with Tecfidera, already a blockbuster small molecule, and, therefore, high-margin asset. This is despite the  commercial costs Biogen has invested to compete with Sanofi and Novartis, both  earlier arrivals in the Multiple Sclerosis  (MS) market.

SOVALDI’S EFFECTIVENESS FAR OUTWEIGHS ITS COST

Not even the most optimistic analyst would have predicted Sovaldi’s success, and, having already generated sales of $5.8 billion in the first half of 2014 alone, Gilead’s Hepatitis C Virus (HCV) franchise could be on course to exceed $13 billion in first full- year sales, based on its current growth trajectory.

GlobalData believes Sovaldi’s approval in December 2013 has resulted in a surge in HCV treatment rates, driven by the unprecedented efficacy and tolerability of Sovaldi-based regimens. Sovaldi represents the greatest leap forward in HCV therapy since the arrival of the first NS3/4A protease inhibitors, Merck’s Victrelis (boceprevir), and Vertex’s Incivek (telaprevir), in 2011. While their improved efficacy compared with the prior standard of care initially drove their uptake, these drugs required multiple pills per day, a prolonged treatment duration, and co-administration with ribavirin and peginterferon, which are associated with debilitating side effects. The glaring weaknesses of Incivek and Victrelis created an opportunity for firms wishing to enter the HCV marketplace, as many patients decided to forego treatment in order to await better options.

Hoping to exploit this gaping void in the HCV treatment landscape, Gilead paid an 89% premium to purchase Pharmasset for $11 billion in 2011, a deal which included the rights to Sovaldi (then known as PSI-7977). At the time, the move was criticized by many industry experts for its high valuation, which was unprecedented for a company with no marketed assets, but the deal now appears to be one of the most shrewd and lucrative to be executed in the industry for some time. It has rapidly propelled Gilead to global leader in HCV treatment, complementing its dominance of the HIV market.

Despite its high cost, stakeholders have clearly accepted that the medical benefit bestowed on HCV patients by a course of treatment with Sovaldi far outweighs the financial burden, and this is validated by its uptake since approval. Indeed, Dr John C. Martin, Gilead’s CEO, stated in the company’s Q2 report that more than 80,000 patients across the US and Europe have been treated with Sovaldi, indicative not only of its clinical benefits, but also the efforts of Gilead to ensure rapid access to its cutting-edge treatment. GlobalData estimates global HCV prevalence to be more than 110 million, with the majority of cases being in China. In stark contrast, the treated population is currently estimated to be less than half a million, though the arrival of Sovaldi will have had a substantial impact on that number in the short time it has been approved.

Sovaldi’s unparalleled success will be strengthened by the arrival of a fixed-dose combination of sofosbuvir with ledipasvir, an investigational NS5A inhibitor. This combination, which will be marketed under the brand name Harvoni in the US, was approved by the Food and Drug Administration (FDA) on 10 October 2014. Harvoni becomes the first interferon-free therapy for genotype 1 (GT1) patients, and its single pill, once-daily dosing offers increased convenience for patients. According to experts interviewed by GlobalData, Harvoni will be the most critical component of Gilead’s HCV franchise over the next 2 to 3 years. Indeed, Gilead executives have indicated they are already beginning to see signs of patient warehousing in anticipation of Harvoni’s arrival. Even as emerging competition from AbbVie, Bristol Myers-Squibb, and Merck & Co. threatens Gilead’s dominance of the marketplace, GlobalData believes the paradigm shift toward simpler, more convenient therapy options will allow Gilead to remain the dominant player in the HCV market by leveraging regimens comprising its prized compound, sofosbuvir.

TECFIDERA’S ADVERSE EVENTS PROFILE ELEVATES BIOGEN TO MS MARKET LEADER

Tecfidera has also shown staggering early sales growth. Through the first two quarters of 2014, Biogen’s flagship MS drug has generated sales of $1.2 billion and is on course to generate just over $3 billion in 2014, figures that would have made it the fastest drug launch in history, were it not for the concurrent launch of Sovaldi in HCV. Tecfidera, an agent which reduces inflammation and promotes neuroprotection through its activation of the Nrf2 transcriptional pathway, has beaten expectations not only in terms of sales growth, but also in proving that, in some cases, first-to-market status does not guarantee insulation from later competing therapies. While Tecfidera was only approved in the US in March 2013, becoming the third oral drug for relapse remitting MS, its entrance has been remarkable.

To this end, Tecfidera’s surge in sales is notable particularly given that it is thethird orally active MS drug to reach the market behind Novartis’s Gilenya (fingolimod) and Sanofi’s Aubagio (teriflunomide), and even more notable given that while Gilenya and Aubagio are administered once per day, Tecfidera boasts a less-desirable twice-daily regimen. The fundamental driver underlining Biogen’s ability to overcome these barriers with such great effect is down to Tecfidera’s safety profile, where the most commonly reported side effects are flushing and gastrointestinal symptoms.

In contrast, the first-to-market Gilenya, which is itself one of the fastest drug launches in recent years, is associated with a risk of serious adverse cardiac reactions, including bradyarrhythmia and atrioventricular blockage. Aubagio carries a black box warning from the FDA, highlighting the risk of severe liver complications associated with its use, and patients initiating treatment with Sanofi’s MS treatment are required to have their liver function monitored. While Tecfidera may not be the gold-standard in terms of its efficacy, its safety profile confers huge advantages in a patient population extremely sensitive to adverse events.

DRUG LAUNCH RETROSPECTIVE: COMPARATIVE ANALYSIS

By all definitions, Sovaldi has shattered existing records and, including the arrival of Harvoni, is on course to generate first full-year sales well over the $11 billion Gilead initially paid to acquire sofosbuvir. To put this further into perspective, Tecfidera would have become the biggest launch in history with sales of $3 billion predicted in its first full year on the market. A third new launch from 2013, J&J’s Olysio, would also have shattered previous records for sales uptake, held by another HCV therapy, Incivek. Interestingly, three of the first four most successful drug launches ever have been in the HCV market, highlighting the extent of the unmet need in this segment. The other biggest launches fell within oncology, cardiovascular, and ophthalmology.

Figure 2 illustrates first full-year sales of 40 major product launches that took place between 2009 and 2013. Clearly, the magnitude of the value added from new launches in 2013, as determined by projected full-year sales in 2014, far exceeds that of any previous year, and this is due not only to the unrivalled success from new HCV therapies Sovaldi and Olysio, but from successful launches across other disease markets as well, including Central Nervous System (CNS) (Tecfidera/Abilify Maintena) and oncology (Imbruvica/Pomalyst/Kadcyla).

In short, there has clearly been a paradigm shift in 2013, and we may finally be seeing the kind of R&D progression the industry has been crying out for, which has in turn converted into significant financial gains for those companies leading the way.

An interesting picture is also painted when we look at the biggest launches in recent years by therapeutic area (TA). Even with the second highest number of high-value launches, 8 in total, average first full-year sales in the infectious diseases space still far outstrips that of any other TA, with major CNS launches coming in a distant second in terms of average first full-year sales. The unmet needs in infectious diseases, combined with the finite lifespan of a number of these new therapies, notably due to the leaps forward in terms of innovation in the HCV market, have forced companies into maximizing returns from new launches.

Interestingly, despite the impact of generics on several key franchises, a number of valuable assets have continued to emerge in the CNS segment, demonstrating impressive uptake levels. Another mature segment, cardiovascular, has also seen multiple strong launches. Oncology represents by far the most prolific TA in terms of the number of high-value launches, 16 in total, with average first full-year sales of oncology assets exceeding $400 million, again highlighting the unmet needs that exist. Oncology has been the focal point of R&D activities for many major pharma companies over the past decade, and this effort and investment has clearly been justified. In contrast, major launches in increasingly crowded immunology and metabolic disorder markets have been relatively slow, despite the strategic importance of these disease segments.

DISTINCT FACTORS INFLUENCING LAUNCH STRATEGIES

Recent launch trends suggest that pharma firms are fulfilling their promises by making significant progress in disease areas in which unmet needs remain high, and therefore, physicians and patients are more receptive to new, and most importantly, better, treatment options. While not mutually exclusive from this migration toward untapped markets, current launch strategies are vastly different from those previously used by Big Pharma in order to penetrate primary care markets with typically high prescribing rates. The success stories of the past 12 months or so denote a dynamic shift in commercialization strategy that has contributed to key successes, including those of Sovaldi and Tecfidera.

Undoubtedly, while we have seen massive strides in terms of efficacy and safety across a number of disease areas, pricing has been a key driver for this recent growth. Indeed, in the US market – the world’s largest for drug manufacturers – Sovaldi was launched at a retail price of $84,000 per year and Tecfidera at $54,900. Despite pricing being an impediment toward attaining reimbursement, the commercial success of these therapies challenges the notion that higher priced drugs may not achieve sustained commercialization success. This is apparent in this instance, as the clinical benefits bestowed by these new therapies far exceed those that have gone before. However, while Sovaldi and Tecfidera have both enjoyed great commercial success in the short time since their respective launches, it is imperative to note that both Gilead and Biogen are facing increased pressures from payers, as more and more patients demand access to these best-in-class therapies.  

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Joshua Owide is GlobalData’s Director of Healthcare Industry Dynamics, overseeing the production and development of numerous industry reports and analytics tools. His expert comments on the pharmaceutical industry have been cited by top publications worldwide, including the Financial Times and the Boston Globe. Prior to joining GlobalData, Mr. Owide was a senior pharmaceutical company analyst at Datamonitor, covering large-cap companies from the US, EU, and Japan. Before this, he undertook a bioinformatics studentship at the Ludwig Institute for Cancer Research, where he analyzed a genome-wide RNAi screen, identifying the importance of specific proteins in cell morphology. Mr. Owide earned his BS in Physiology from the University of Leeds. http://healthcare.globaldata.com.