The Friday Five – 5 questions raised this week in pharma

July 17, 2014
Ref: Friday Five Desk

Will the tax-inversion frenzy be allowed to continue?

Mylan's proposed $5.3-billion acquisition of Abbott's branded generics business – announced Monday – furthers two prevalent trends in the pharmaceutical industry; the currently favoured pursuit of so-called inversion deals, which allow US companies to reduce their corporate tax rates, and continued evolution of the generic drug sector.

Tax inversion – or more specifically transactions designed to achieve this goal – show no sign of moving off the industry radar, but are becoming an increasingly prominent issue in the US political arena.

Not only does the Mylan/Abbott deal demonstrate a more aggressive approach to re-domiciliation, but the past week has also seen AbbVie move closer to completing a deal to acquire Shire, another deal with tax inversion position firmly as the key catalyst.

There has been some suggestion that the AbbVie/Shire deal could be under threat if legislative changes in the US are enacted that allow for retrospective action to be taken (a banning of inversions backdated to May).

Analysts at International Strategy & Investment were quick to point out, however, that calls for legislative change in response to the recent space of inversion deals (in and out outside of the pharma sector, and particularly in response to Pfizer's proposed acquisition of AstraZeneca as an 'inversion deal too far') may show little more than this issue becoming politicised by Senate Democrats in the run-up to mid-term elections, with any action in 2014 unlikely. Rather, ISI analyst Terry Haines suggests that "we continue to believe Congress will not take action this year to "stop" inversions, and 2015 will see a bipartisan comprehensive tax reform effort that improves incentives for US companies to stay in the US. Inversions contemplated or announced between now and the 2014 midterm elections will have to contend with increased political noise and headline risk, but inversions legislation in 2014 remains very unlikely."

On Monday FirstWord will take a look at recent pharma inversion deals and potential inversion targets and acquirers.

More deals for Mylan?

From Mylan's perspective, the deal for Abbott's branded generics business compensates for its failure to acquire Meda Pharmaceuticals earlier this year, and according to analysts positions the company alongside the likes of Actavis, Valeant Pharmaceuticals and other prominent players in the specialty pharma sector.

The products acquired by Mylan are expected to generate 2014 sales of around $1.9 billion in the EU, Japan, Canada, Australia and New Zealand. While associated revenue is declining at a single-digit pace year-on-year, Mylan hopes to stabilise this trend and look to improve efficiencies on the cost side.

What appears to be a win-win deal for both parties is a "capability building" rather than a "synergy-focused" transaction for Mylan, says Bernstein analyst Ronny Gal. With the Abbott generics business providing Mylan with both an increased sales and marketing force (of around 2,500 personnel) and two manufacturing facilities, these additions will "offset some of the investment that Mylan was planning to do anyways," adds Gal.

More importantly, with an enhanced infrastructure in place and a reduced tax rate, Mylan is better placed to compete with the likes of Actavis and Valeant in the hunt for additional acquisitions, suggest analysts, with low interest rates set to support the use of M&A as a means to bolster reduced organic growth opportunities.

Specialty players have been touted as potential acquirers of lower-margin business units that Big Pharma may look to discard in order to sharpen focus on the development of higher value, innovative products, and it emerged this week that Sanofi has reportedly already held preliminary negotiations with a number of potential buyers for the sale of its so-called 'established products' division – a collection of older, off-patent brands. Indeed, Mylan is believed to have been one of the interested parties. GlaxoSmithKline is another Big Pharma that remains open to divesting older brands.

Will a preventative approach help to solve the Alzheimer's disease conundrum?

The announcement by Novartis on Tuesday that it plans to initiate studies for potential Alzheimer's disease therapies in patients who have yet to demonstrate any symptoms appeared to be an even smarter move a day later, when Roche unveiled mixed Phase II data for crenezumab.

Somewhat mirroring data presented for Eli Lilly's solanezumab last year, Roche's antibody demonstrated no discernible benefit on cognitive decline in the overall mild-to-moderate population in which it was studied. Crenezumab did, however, show some positive impact in patients with milder forms of the disease.

Where Roche takes crenezumab from here remains conjecture at this point.

Supporting any decision to progress with further clinical studies is the fact that while the benefit provided was not statistically significant, it was demonstrated that all subgroups who received crenezumab did do better than those who did not. Furthermore, the data provides further evidence – as per one of the Phase III solanezumab studies – that treatments targeting beta-amyloid appear to be more effective in earlier-stage patients with milder forms of Alzheimer's disease.

Furthermore, the differentiated design of crenezumab allows it to be dosed at a significantly higher level (approximately 50 times higher) than bapineuzumab, another beta-amyloid targeting antibody that failed in Phase III studies last year. There is still some speculation that low dosing of bapineuzumab – to reduce side effects – played a role in its failed late-stage studies, argues Bernstein analyst Tim Anderson.

Supportive evidence against the costly implementation of further studies for crenezumab is the fact that a second trial involving solanezumab (the largest to date in mild Alzheimer's patients) failed to demonstrate any discernible benefit, while a number of commentators pointed out that positive effect with Roche's drug largely occurred in the first half of the study period, evidence perhaps that trial data may translate to a very limited clinical benefit in the real-world setting.

The decision making process is made more difficult given the commercial opportunity that exists for any product that demonstrates some disease-modifying benefit; a potential goldmine that has seen developers abandon their typical 'success ratio' of 60-70 percent when choosing to progress candidates into late-stage testing, says Anderson (AstraZeneca CEO Pascal Soriot recently suggested that the company's Phase II/III BACE inhibitor had a 9 percent chance of reaching the market).

Roche's choice may also be shaped by the previous progression of another product – gantenerumab – into two ongoing Phase III studies (initiated without study in Phase II efficacy trials). While gantenerumab does share more similarities with bapineuzumab (which could increase the chances that crenezumab is the 'better' product, argues Anderson), one of the Phase III studies is targeting prodromal Alzheimer's disease patients, which supports the thesis that if the beta amyloid approach holds any chance of success then earlier-stage use is critical. Likewise, Roche is also testing crenezumab in a prevention study carried out among a Columbian population with a familial, inherited form of Alzheimer's disease – arguably the most promising preventative approach initiated to date says Adam Kline, a biomedical researcher with 14 years experience in the Alzheimer's disease space.

Will cost of Sovaldi have broader impact on US pricing landscape?

Further requests made of Gilead Sciences – this time by members of the US Senate Finance Committee – to provide information supporting the pricing strategy for its hepatitis C therapy Sovaldi should have minimal impact on the broader pricing landscape or Gilead's aspirations in the hepatitis segment, suggested analysts this week.

Analysts and investors are in more bullish mood than they were three months ago when the issue of Sovaldi's pricing was first raised by members of the US House Energy & Commerce Committee, who asked Gilead to provide a briefing on the therapy's "extraordinarily high cost." This request triggered a sell-off across the biotech sector and fuelled speculation that valuations had become increasingly stretched.

While some concerns linger over the value of earlier stage, single-asset players, many analysts maintain that Gilead stock remains relatively cheap, given the potential explosion in sales growth that could occur once its Sovaldi/ledipasvir combination is launched later this year. Second-quarter sales of Sovaldi are expected to beat consensus projections of $2.9 billion, possibly hitting the $3.5 billion mark, according to some analysts.

Although confidence remains high that specialty drug prices will retain their elasticity in the short to medium term future, the presence of large resource-sapping products such as Sovaldi could still have an indirect impact on payer efforts to reduce spending on drug classes where there is greater opportunity to reduce costs.

Pharmacy benefit managers remain vocal about the high cost of new hepatitis C therapies and retain aspirations about utilising increased competition as a means to extract future price discounting. "The system can absorb a Sovaldi or two, but if pharma is successful in delivering a handful of other high price drugs to the market over the next few years (think PD-1 inhibitors, PCSK-9 inhibitors), then savings will have to be found somewhere," Bernstein analyst Ronny Gal told FirstWord.

Spotlight On: Pharma watch out! – US formulary exclusions expected to increase in 2015.

Will the next-generation of AMD therapies render the Avastin/Lucentis argument redundant?

There has been recent speculation as to whether more European authorities will permit the use of compounded Avastin as a significantly cheaper alternative to Lucentis or Eylea; which largely dominate the market for wet age-related macular degeneration (AMD). France recently followed Italy in supporting its usage, which Roche and Novartis continue to dispute on safety grounds (Lucentis is marketed by the two Swiss players, Avastin by Roche in the cancer space).

Feedback from EU5 and US-based physicians polled by FirstWord this week indicates that confidence levels towards use of compounded Avastin appear to be comparable between most EU5-based ophthalmologists and those based in the US (UK respondents were a notable exception), where usage is more prevalent.

That said, with AMD – and a handful of other ophthalmic conditions – currently acting as an area for multiple late-stage developments, it is encouraging to see that physicians appear flexible in shifting their future prescribing habits for products that offer improvements, be this via incremental increases in efficacy or reduced dosing.

See Physician Views Poll Results: European comfort levels for off-label Avastin use in AMD match US, but opportunity for new therapies persists.