Pfizer 3Q16 – Ertugliflozin “on track” for 2016 FDA submission; Phase 3 PCSK9 inhibitor bococizumab discontinued; Phase 1 NASH candidate added to pipeline; Strong commentary on drug pricing in the US – November 2, 2016

Pfizer provided its 3Q16 update on Tuesday morning in a call led by CEO Mr. Ian Read. See below for our top five highlights on promising SGLT-2 inhibitor candidate ertugliflozin, the discontinuation of phase 3 PCSK9 inhibitor bococizumab (given safety issues, this was not at all surprising, particularly given the weak commercial environment), other pipeline updates in the realm of diabetes, lipid-lowering, and NASH, and management’s take on drug pricing in the US (this is a recurring theme among drug company financial updates for 3Q16 – we’d love to see more transparency so we’re happy to hear these views). This full report contains expanded coverage, with much detail added to the “First Look” we published just after the call.

Read on for these highlights, a pipeline summary of Pfizer’s products in development, and relevant Q&A from today’s call.

Top Five Highlights

1. Pfizer continued to highlight the progress of its Merck-partnered phase 3 SGLT-2 inhibitor ertugliflozin, spotlighting positive phase 3 data from the VERTIS SITA2 trial presented at EASD 2016. Pfizer and Merck plan to submit ertugliflozin, an ertugliflozin/metformin fixed-dose combination (FDC), and an ertugliflozin/sitagliptin (Merck’s DPP-4 inhibitor Januvia) FDC to the FDA by end of 2016. While no new details were shared on the product (this most recent timing was previously announced by Merck during the VERTIS SITA2 oral presentation at EASD), Pfizer management was optimistic about the market potential for SGLT-2 inhibitor ertugliflozin and underscored that the companies are “on track” for the planned submission in the US as well as for other regulatory filings to come in 2017.

2.  In a surprise, management announced that Pfizer has discontinued development of its phase 3 PCSK9 inhibitor bococizumab, ostensibly due to safety reason but we wonder the degree to which commercial perceptions also played a role. Specifically, management attributed this decision to an observed attenuation of lipid-lowering over time in the 52-week data from the phase 3 program – long-term cholesterol lowering is necessary for cardiovascular (CV) benefit, management explained, and so bococizumab likely wouldn’t offer risk reduction for CV events. Furthermore, the phase 3 data for bococizumab demonstrated a higher level of immunogenicity and a higher rate of injection-site reactions compared to already-marketed PCSK9 inhibitors Praluent (alirocumab) from Sanofi and Repatha (evolocumab) from Amgen. Bococizumab’s cardiovascular outcomes trials (CVOT) had the potential to support a broader indication than either of these other agents, since SPIRE-1 and SPIRE-2 were designed to evaluate both primary and secondary CV prevention. Ultimately, the company concluded from “a totality of clinical data” on bococizumab that the agent wouldn’t provide value to patients, physicians, or shareholders if brought to market – we suspect if the payer environment were better that the decision may have been different but it is hard to speculate too much on this front.

3. During Q&A, management articulated that Pfizer no longer views PCSK9 inhibitors as a promising area of investment, which suggests bleak prospects for oral PCSK9 inhibitor PF-06815345, still listed as a phase 1 candidate in the company’s pipeline. Management shared in 2Q16 that this candidate had demonstrated disappointing efficacy compared to injectable PCSK9 inhibitors thus far.

4. In more positive news, we were pleased to see the addition of a phase 1 candidate for NASH to Pfizer’s pipeline – this area of unmet need has been the focus of increasing investment of late. For more on NASH therapies (or lack thereof), see our updated competitive landscape.

5. The theme of drug pricing emerged during Q&A, with management calling for greater transparency from pharmacy benefits managers (PBMs) but also acknowledging that nothing will noticeably change in terms of high PBM rebates unless we see legislative action in the US. There was also much discussion of Proposition 61 in California: Following suit with J&J, Merck, and Lilly, Pfizer expressed a staunchly negative view of the bill and the impact it will have on patients.

Top Five Highlights

1. Ertugliflozin: On Track for FDA Submission in 4Q16

Pfizer continued to highlight the progress of its Merck-partnered phase 3 SGLT-2 inhibitor ertugliflozin. Management shined a spotlight on positive phase 3 data from the VERTIS SITA2 trial presented at EASD 2016 – ertugliflozin met its primary endpoint of statistically significant A1c lowering vs. placebo when added on to Merck’s DPP-4 inhibitor Januvia (sitagliptin) and metformin, and also demonstrated clinically meaningful weight loss, reductions in fasting plasma glucose, and reductions in systolic blood pressure. Moreover, ertugliflozin was well-tolerated, with no signals for safety concerns. Pfizer and Merck plan to submit ertugliflozin, an ertugliflozin/metformin fixed-dose combination (FDC), and an ertugliflozin/sitagliptin FDC to the FDA by end of 2016. While no new details were shared on the product (this most recent timing was previously announced by Merck during the VERTIS SITA2 oral presentation at EASD), Pfizer management remained optimistic about the market potential for SGLT-2 inhibitor ertugliflozin and underscored that the companies are “on track” for the planned submission in the US as well as for other regulatory filings to come in 2017. Management’s optimism echoes its comments from Pfizer’s 2Q16 update, when management suggested that ertugliflozin may have “best-in-class” potential. We’re happy to see a continued, consistent positive outlook from both companies developing ertugliflozin and its combinations, as this candidate could grow the SGLT-2 inhibitor class and could offer another terrific therapeutic option for patients. We see the ertugliflozin/sitagliptin combination as especially promising, and Pfizer management has previously expressed enthusiasm for the potential future demand for the combination given the positive (read: reassuringly neutral) cardiovascular outcomes results for sitagliptin. The SGLT-2 inhibitor/DPP-4 inhibitor combination class boasts an especially promising clinical profile, but sales of Lilly/BI’s Glyxambi (empagliflozin/linagliptin) – the only combination approved in the US – have been sluggish at best. Lilly management acknowledged in its 3Q16 update that it has not invested significantly in marketing or ensuring access for Glyxambi and we expect Pfizer/Merck’s combination will fare better with the two powerhouses focusing concerted investment in its promotion. The ertugliflozin/sitagliptin combination will likely be the third to market, as AZ’s Qtern (saxagliptin/dapagliflozin; approved in the EU) is currently under FDA review.  For more, see Merck’s similarly positive commentary on ertugliflozin during its recent 3Q16 financial update.

2. Bococizumab: PCSK9 Inhibitor Discontinued from Phase 3 Development

Management announced that Pfizer has discontinued development of its phase 3 PCSK9 inhibitor bococizumab. Management attributed this decision to “a totality of clinical data” demonstrating disappointing long-term efficacy as well as concerning safety signals. More specifically, management cited (i) attenuated lipid-lowering over 52 weeks, (ii) higher levels of immunogenicity, and (iii) greater rates of injection-site reactions – which in sum suggest that the agent wouldn’t provide value to patients, physicians, or shareholders if brought to market. In the phase 3 program for bococizumab, 52-week data showed a smaller magnitude of lipid-lowering over time – long-term cholesterol lowering is necessary for cardiovascular (CV) benefit, management explained, and so the candidate likely wouldn’t offer risk reduction for CV events. That a treatment can impact CV outcomes is an important value driver, management continued – this was clearly one prominent factor contributing to the discontinuation. This discontinuation is particularly unfortunate, as it seemed that bococizumab’s cardiovascular outcomes trials (CVOTs) had the potential to support a broader indication than either Sanofi’s ODYSSEY trial for Praluent (alirocumab) or Amgen’s FOURIER trial for Repatha (evolocumab), since SPIRE-1 and SPIRE-2 were designed to evaluate both primary and secondary CV prevention. A drug that offers demonstrated cardioprotection even in lower-risk populations would have been such an incredible stride forward in terms of expanding the indication for PCSK9 inhibitors, though this is now markedly further down the line. Moreover, bococizumab demonstrated “unanticipated” high immunogenicity and higher frequency of injection-site reactions than Praluent or Repatha, both of which are already on the market. Management underscored that the decision to discontinue a candidate in phase 3 was difficult, but that ultimately, it did not seem that bococizumab would be an effective player in the commercial PCSK9 inhibitor market.

• Very notably, management also cited “access restrictions” within the PCSK9 inhibitor class as a reason for discontinuation: “These access restrictions have meaningfully dampened our initial expectations for the market potential” of bococizumab. These comments refer to the current widespread reimbursement woes for PCSK9 inhibitors, which have contributed to modest sales for the agents thus far. Indeed, we learned at CMHC 2016 that, even when payers ostensibly over coverage for the class, these agents have a denial rate of 80%-90%, and even after expensive appeals only about 27% of privately insured patients and 46% of Medicare beneficiaries are able to obtain approval. It’s incredibly discouraging to see a disincentive for innovative drug development stemming from inadequate insurance coverage, though we acknowledge that there are many reasons for the prohibitively-expensive cost of agents in this class and that the overall healthcare system might benefit from statin use by all patients who can tolerate them (this was a major point emphasized by University of Glasgow’s Dr. Naveed Sattar at ADA 2016). We can only hope for some middle ground that doesn’t cut-off access to PCSK9 inhibitors for patients who would truly benefit from the newer, more potent lipid-lowering agents. Even with statin therapy, many patients with diabetes sorely need agents that can more effectively address their residual cardiovascular risk. Pfizer, however, seems to be exiting from the PCSK9 inhibitor arena entirely… more on this in reference to the company’s oral PCSK9 inhibitor, below.
• Pfizer adjusted both its EPS and R&D Expenses guidance for 2016 based on the decision to discontinue bococizumab. The company estimated a resultant negative $0.04 per share impact on EPS and an additional $300 million in R&D expenses. Based on this adjusted guidance, total 2016 R&D expenses are now estimated to be $7.8 to $8.1 billion (up from $7.5 to $7.8 billion) and EPS is estimated at $2.38 to $2.43 (down from$2.42 to $2.47). The large impact of this decision on the R&D Expenses guidance further reinforces the massive cost and high-risk nature of drug development.

3. Bleak Prospects for Pfizer’s Oral PCSK9 Inhibitor

During Q&A, management articulated that Pfizer no longer views PCSK9 inhibitors as a promising area of investment, which suggests bleak prospects for oral PCSK9 inhibitor PF-06815345. For now, PF-06815345 is still listed as a phase 1 candidate in the company’s pipeline. Management shared in 2Q16 that this candidate had demonstrated disappointing efficacy compared to injectable PCSK9 inhibitors thus far – in conjunction with the dominant sentiment from Pfizer’s 3Q16 call, we expect Pfizer to discontinue development of this particular oral PCSK9 inhibitor agent, especially as company strategy shifts away from opportunities in PCSK9 inhibitor therapy. In response to a question about how Pfizer might approach the PCSK9 inhibitor marketplace now, “with fresh eyes,” management answered: “Would we today begin a new program? The answer is no. We’re too far behind.” This perspective doesn’t bode well for an extremely early-stage oral PCSK9 inhibitor, especially given the depth of Pfizer’s overall product pipeline. See the table below for a complete picture of Pfizer’s diabetes, lipid-lowering, and NASH pipeline.

4. Phase 1 NASH Drug Officially Added to Pipeline

In more positive news, we were pleased to see the addition of a phase 1 candidate for NASH to Pfizer’s pipeline. The company first mentioned that its hyperlipidemia efforts may soon include NASH (nonalcoholic steatohepatitis) therapies in 2Q16, and as of its 3Q16 update PF-05221304 was added to the company’s pipeline page as a phase 1 small molecule compound in phase 1 for the treatment of NASH. This area of unmet need has been the focus of increasing investment of late: Allergan doubled-down on its investment in NASH with the acquisition of Tobira Therapeutics and Akarna Therapeutics, plus Novo Nordisk hinted at near-term expansion of its NASH pipeline during its recent 3Q16 update. We’re glad to see Pfizer’s commitment to this field – to date, there are no approved therapies for NASH, even though it persists as a serious condition and comorbidity of type 2 diabetes. We welcome disruptive innovation for progress on this front. For more on NASH therapies (or lack thereof), see our updated competitive landscape. The table below offers a complete picture of Pfizer’s diabetes, lipid-lowering, and NASH pipeline.

Pfizer Diabetes and Metabolic Disease Pipeline Summary

5. Commentary on US Drug Pricing, PBMs, Proposition 61

Ongoing controversies over drug pricing emerged during Q&A, with Pfizer management calling for greater transparency from pharmacy benefits managers (PBMs) but also acknowledging that nothing will noticeably change in terms of high PBM rebates unless we see legislative action in the US. CEO Mr. Read gave rather extensive remarks on the topic (see a full transcript from Q&A below), pointing out that many politicians see pharmaceutical companies as the driver of high-cost prescription medicines, when in reality PBMs take high rebates with little regulation – this reminded us of comments made Drs. Jay Skyler (University of Miami, FL) and Irl Hirsch (University of Washington, Seattle, WA) at CMHC 2016, when both diabetes experts called out the discrepancy between the limited value that PBMs bring to the healthcare system and the profits they reap. This recognition of where drug prices skyrocket the most seems to us like an important step forward, albeit a small one – that said, we would welcome concrete, constructive solutions, which appear in short supply. That said, we’ve been very intrigued throughout this 3Q16 earnings season by the trend of many pharmaceutical companies outlining their stance on the now-politicized issue of US prescription drug prices. Mr. Read stood firm that policy changes – “a legislative fix” – should be the stimulus for the necessary changes to healthcare payment schemes and high PBM rebates. We haven’t heard much from Big Pharma acknowledging the higher deductibles and co-pays that patients in the US are paying – despite whether it is PBMs or others taking the funds, this move by employers has made it much more difficult for patients to afford medicine.

• There was also much discussion of Proposition 61 in California: Following suit with J&J, Merck, and Lilly, Pfizer expressed a staunchly negative view of this specific bill and the impact it will have on patients, despite management’s broader support for new drug pricing policy. If passed, the proposition will require state agencies to pay the same prices that the US Department of Veterans Affairs (VA) pays for prescription drugs. Mr. Read emphasized that this would have adverse consequences on the majority of patients, and further argued that the proposition would prove impractical in implementation – it would be unworkable for the rest of government (outside the VA) to pay the same non-commercial prices listed for the VA, in his view. While the proposition clearly holds many flaws that have led major pharmaceutical companies to publicly speak out against it (Lilly management went so far as to say the company is “fighting tooth and nail” against the measure), we would love to see these companies publicly work with government agencies and payers to create and support alternative proposals to make drugs more affordable for patients (particularly uninsured or underinsured patients). While there are clearly issues related to PBMs, much of the challenge for patients stems from changes that employers have made on the insurance front – as noted, much higher deductibles and co-pays. For more on the debate surrounding Proposition 61, see our coverage of Lilly’s 3Q16 update. Overall, in our view, Proposition 61 is a clearly a manifestation of the growing public and political frustration with rising and unaffordable drug costs and we applaud efforts to make access to medications easier for patients. However, as with most policy proposals, the devil is in the details and clearly many stakeholders on all sides of the issue feel that this particular proposition is deeply flawed and could have severe unintended consequences. We hope that the advocacy and frustration that led to the creation of this proposition can be channeled toward improved, thoughtful solutions to the prescription access issue that are able to truly enhance the affordability of medications for the majority of patients. Affordability is no small issue in US healthcare, and at the very least, we’re glad that the topic has entered the arena of political discussion with participating voices from industry.
• Moreover, Pfizer management criticized the hyper-focus on the drug industry when healthcare costs are more so driven by medical services. As outlined by Mr. Read, the US spends 17% of its GDP on healthcare but only ~2% on drugs. Meanwhile, ~12% goes to inpatient and outpatient medical services. Other OECD countries spend ~9% of their GDP on healthcare, ~1.5% on drugs, and only ~5.5% on medical services. This illustrates the breadth of the American healthcare spending problem, and Mr. Read suggested that zooming in on drug pricing causes many policymakers and political thought leaders to overlook the larger issue of excess spending on medical services. In fact, he pointed out that payers are more generous with coverage for medical services (reimbursing ~96%) than they are with coverage for prescription drugs (reimbursing ~83%). This represents a choice to prioritize medical services over drugs (which often play a preventive role), potentially leading to greater healthcare spending in the long run due to the high cost of even a single hospital visit. Mr. Read also acknowledged the extra ~0.5% of GDP spent on drugs in the US vs. other OECD countries, explaining that the extra half point allows for a “vibrant, research-based,” “innovative” pharmaceutical industry which adds value to the healthcare system overall ­– according to him, pharma contributes $1.3 trillion to national GDP. We’ve heard a similar argument from ADA Chief Medical Officer Dr. Robert Ratner and we were glad to see it articulated by a leading pharma CEO – obviously payers are only one piece of the puzzle, but we agree that it’s futile to discuss and criticize expensive drugs when we’re also spending too much on other facets of healthcare.

Questions and Answers

Q: Can you talk a little bit about pricing in the US, and specifically about Proposition 61? The most recent polling seems to show that if a vote were held today, it would pass despite industry fighting it. Can you describe what you think the impact would be on innovation and pricing? Some have pointed to the supply chain – specifically, PBMs – as being part of the problem in the lack of transparency. Do you agree? Should the US be willing to discuss PBM rebate controls?

A: Look, drug affordability is an issue that is concerning to us, and it’s clearly been amplified in this election cycle. There is considerable uncertainty and turmoil about both candidates' positions on these issues and it's difficult to decipher between campaign rhetoric and legitimate policy views. It's disappointing that this pricing debate has completely neglected the other side of the ledger – the benefits and value added by the pharmaceutical industry. While we understand that healthcare costs have been increasing for many patients, we disagree with the prevailing notion among some politicians that pharmaceutical companies are the reason for these rising costs. We believe that post the election cycle, good public policy will prevail.

Currently in the US, we spend 17% of our GDP on healthcare, yet we only spend 2% on drugs. About 12% of GDP goes to inpatient and outpatient medical services. When we compare ourselves to other OECD countries that spend 9% of their GDP on healthcare, they spend 1.5% on drugs and only 5.5% on medical services. The half-point of GDP extra on drugs in the US allows for a vibrant research-based industry that is producing roughly $1.3 trillion of value to the nation’s GDP. I think policymakers are well aware of the importance of maintaining an innovative pharmaceutical business.

If you look at cost increases in the US between 2004-2014, hospital service costs have increased 75%, while prescription drug costs have increased 35% and lag behind overall medical costs with around 40% growth. What’s further exasperated the problem for patients is that their insurance plans, on average, cover a much lower share of prescription drug costs (83%) compared to the cost of medical services (96%). Insurance companies are making a choice to subsidize health services more than drugs. You see this in payers’ actions – increasing co-pays and shifting drugs into the deductible. In 2016, the branded pharmaceutical industry took an average 2.8% net price increase. I think the market is reacting to the fact that among pharmaceutical businesses, there are two markets – branded, patent-protected products which increased prices by 2.8% vs. difficult-to-make generics or exclusive generics where we’ve seen certain actors force what society sees as unreasonable price increases. We need better solutions – we need to fix the policies and regulatory practices that allow for single source suppliers, and we need to ease the pathway for generics.

Now let’s talk about the PBM rebate issue. Look, I think the rebates have served an important purpose in facilitating negotiations on pricing-related transactions. And I think they are becoming less helpful now in getting cost-effective solutions to patients. We need a legislative fix to ensure that the pharmaceutical industry has the ability to moderate price according to volume – that would be in the best interest of patients.

Now, onto Prop 61. If we voted today on the merits of the proposition, it should be rejected by California voters. We don't see overall benefit to healthcare costs for California. It's difficult to say exactly what will happen come Election Day, but once we know the results, the industry will formulate its public policy responses. I would like to say, though, that Prop 61 is basically untenable. It's asking for an extension of non-commercial prices – which have been reserved for veterans for very good reason, given their special contribution to society – to the rest of government, and that’s just not workable. Between voting and implementation, there will be six months, and I expect to see a lot of public policy discussions in that time.

Q: On the bococizumab discontinuation: Obviously this would have been a large commercial investment, money which you’ll now save. How will this influence Pfizer’s strategy?

A: It doesn’t have that dramatic of an implication, as its contribution to our EPS (earnings per share) was modest by most analysts’ standards. It certainly does indicate that we have to continue to make portfolio decisions based on what we think we’ll get on the return.

Q: It sounds to me like the decision to discontinue your PCSK9 was based only on the emerging profile of your specific drug – the “evolving landscape” as you put it hasn’t actually evolved yet, because we don’t yet have clinical outcomes trials. So, I’m wondering if you saw something with your trials – do you have additional details on LDL-lowering and other events?

A: We’re making our decision based on the profile of our drug, not the profiles of other drugs. What we saw at 12 weeks and at 24 weeks was sustained, robust LDL-lowering. Only recently did we get the data for 52 weeks, and we saw a substantial reduction in LDL-lowering, which we correlated to neutralizing antibodies. Then we also see injection-site reactions in some of our trials. When you look at the total profile, we don’t believe it will be commercially successful, or that it will benefit patients if we bring it to market.

Q: How do you see your ability to take price going forward?

A: We’ve always priced responsibly. We’ve priced to the marketplace and to the value of our products. We’ve always made provisions for patients who have no insurance or poor insurance, so they get our products for free or nearly for free. We don’t believe there’s any reason for Pfizer to change its approach to the pricing of our products as we sit here today.

Q: If you were looking at the PCSK9 inhibitor market with fresh eyes, would you consider this an area for opportunity and investment for Pfizer?

A: Would we today begin a new PCSK9 program? The answer is no. We’re too far behind.

Q: Do you think there’s going to be a material change in the relationship between pharmaceutical companies and PBMs over the next three years?

A: We do work with PBMs, and we think they’ve played a role in access and reducing costs for patients. The issue is the size of the rebates, and of course, pricing transparency. We’d like to see this markedly changed, but it would require legislative action. Absent of that, I don’t think we’ll notice a substantial change. It depends on how much Congress cares about having high net prices, which we’d say is a disservice to patients, especially those who are not insured or poorly insured.

-- by Payal Marathe, Helen Gao, and Kelly Close