Q3 2014 Biotech Earnings Preview

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5 to Top 10 Biotech Report This week

As seen in the table above, 5 of the top-10 names in the NASDAQ biotechnology index report earnings this week. Four more report next week and the remaining company reports on November 4th.

Gilead Sciences (NASDAQ:GILD)

• Harvoni launch color + patient mix
• ABBV DTC is preemptive move
• Buybacks but No big deals in the near future

Investors will be focusing on guidance for the launch of Harvoni from Gilead. Their all-oral (ribavarin free) Hepatitis C (HCV) regimen for Genotype-1 patients was approved by the FDA on 10/10. While management will have very early numbers on the Harvoni launch, keep in mind that it is very early days into the launch and the launch trajectory may not yet be meaningful.

Of particular interest as the Harvoni launch progresses will be the percent of patients taking the drug for 8 weeks vs. for 12 weeks. Treatment naive patients with relatively low viral loads can take Harvoni for just 8 weeks and GILD estimates that 45% of patients will fall into this group.

Pay Attention to ABBV

While Harvoni was largely expected to receive approval, the next major issue investors are concerned with is how well the drug launch will fare once Abbvie's (NYSE:ABBV) new HCV regimen is approved in December. For the harder to treat treatment experienced cirrhotic patients, the ABBV regimen has slightly better cure rates.

Investors are anxiously awaiting to see where ABBV comes in regarding pricing. One possible strategy for ABBV is to price on par to GILD's estimate average patient cost of $80,000. In this case, for the treatment experienced patients ABBV would actually be cheaper than Harvoni and arguably has better cure rates.

We've already seen signs of ABBV planing their launch strategy. In the last 2 weeks, ABBV has been conducting non-branded DTC ads aiming to drive patients to a website where they can get information and create a personal "action plan". This is a lead generation effort that helps ABBV build a database of patients from whom the can then select the most appropriate prospects to initiate their therapy in the early days of the launch.

Uses of Cash

We expect that GILD will have used up the remaining $1.7B in share buy-backs under their 2011 repurchase program. With the recent dip in GILD to the $95 level in the past week, GILD may have dipped in to the new share repurchase program whichh is designed to buy up to $5 billion worth of stock over 3 years.

No major deal likely in near future. According to management commentary at the Morgan Stanley conference in September. GILD is not actively looking to expand it's pipeline by making a major acquisition at this point in time. Several times during his commentary COO John Milligan mentioned the idea that the hard push to get Sovaldi and Harvoni approved has "stressed the organization" specifically he mentioned that "I don't think we have the capacity to do anything transformative at the moment".

Vertex Pharmaceuticals (NASDAQ:VRTX)

• Advisory Committee for R117H mutation on 10/21- FDA wanted second study
• Kalydeco + Lumacaftor submission in Q4
• Profitability in 2015 ?

Vertex has an advisory committee meeting for Kalydeco in patients with the R117H mutation on 10/21. The clinical trial for this population failed to meet it's primary endpoint, though a subset analysis indicated that adults over the age of 18 has a benefit. According to the FDA briefing documents, the agency had suggested that the preferred route would be for VRTX to conduct an additional small study in adults with the R117H mutation to confirm the results of the subset analysis. The idea of submitting the sNDA was considered "a less favorable alternative".

VRTX chose to submit the sNDA anyway, possibly banking on the fact that Kalydeco is already approved and the Advisory Committee members might be swayed to help patients sooner rather than later.

We'll know the results of the Ad. Comm. the week before VRTX reports earnings.  If the outcome is negative and the stock pulls back significantly, this may be a buying opportunity.

Later this quarter VRTX is expected to submit the NDA for the combination of Kalydeco and VX-809 (lumacaftor). Given the successful Traffic and Transport studies, we anticipate approval of this combination, opening up a market of more than 28,000 patients worldwide. If the NDA is given a 6-month priority review, VRTX may be in a position to launch the combination pill by Q3 next year. While analyst estimates vary widely, consensus suggest VRTX ending 2015 with a profit of 10 cent per share for the year - driven largely by top-line growth due to the combination therapy.

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