## An estimate for Incivek's value

The following estimate of Incivek’s earning power is based on many assumptions and should not be considered as an inducement for investment. Still it is the best I can come up with for the launch year of 2011-12.

Back in 2009 BOC was thought to be at least 2 years behind TVR because of the EPO issue, and my estimate neglected its effect on TVR’s first year sales. Merck has effectively ambushed Vertex by executing unannounced phase III trials for BOC and by finding the very generous FDA.

The estimate below assumes the market share of Victrelis is 40%, and that of SOC is 10%. Major uncertainties come from two sources: 1) the number of patients who would choose the treatment with protease inhibitors (PI), and 2) actual payment for the drug. With this understanding I venture to estimate the potential earnings power of Incivek for the launch year.

The total number of patients who will choose to be treated in the launch year of PI would be about 100 thousands. Assume that only 50% of the group takes Incivek. This gives 50,000 patients to choose Incivek in the launch year; this may be conservative, but it is the company’s target. This figure can be arrived as follows: there are 3~400 specialist doctors in contact, each treats 3 patients a week. This gives 3 pts x 52 wks x 350 = 54600.

The drug for 12 wks costs $49,200 for a patient, but the wholesale price would be less, I neglect the differential below. If you multiply the figures, you come up with 50,000 x 49,200 = $2.95 billion. The actual revenue would be much less than this amount because (1) some patients will receive the drug free of charge (they have no insurance AND the household income is less than 100K, both CCO and CFO said this category is only a single digit %), (2) copay would be reimbursed by Vertex (c.c. stated ~60% are insured by private insurance cos, and copay is typically $50-$250/mo), (3) unknown amount would be discounted to the holders of government sponsored insurance and they make up ~35%and (4) 5 % of patients will pay cash.

All of numbers in (1)~(4) came from the conf. call held after the FDA approval.

Below, we estimate the revenue reductions due to each category above.

(1) Assume that the number of patients who get free drug is 10%;

Then, the paying patient’s number is 45,000.

(2) Assume that all insurance cos get 20% discount. Copay reimbursement is about $200 /mo for 3 months. 60% of paying patients belong to this category;

60% of 45,000 pts = 27,000

The revenue loss from the discount is: 20% x 49.2K x 27K = 265.7M

Total copay payment by Vertex = 27,000 x $600 = $16.2 M

(3) Let us assume Vertex’ contribution here is about 20%.

35% of 45,000 = 15,750

20% of 15,750 x 49,200 = 155 M

This amount has to be subtracted from the revenue.

(4) Cash purchase leaves the amount intact.

The net from the US sales will be:

49,200 x 45,000 – 265.7M - 16.2M – 155M = 1777M

The EU sales estimate (CSO said the EU approval will likely occur in October) is based on two assumptions: 1) the number of paying patients is 50,000, 2) J&J offers 20% discount to the price.

49,200 x 50,000 x 80% = 1,968 B

Since there will be only 6 months of sale until next June; 984 M ...a 25% royalty from that is 246 M.

The total estimated revenue from both the US and EU operations is the addition of the above two:

1777 M + 246 M= 2.02 B.

The annual expenditure would be more than the current rate of $700 million. Let us say that it is $1 billion for the coming 1 year because pipeline developments would accelerate. By June 2012 the total number of outstanding shares would be around 210 million. Thus, the potential earnings per share would be $4.86 per shr.. I suspect the actual figure will be less than this because of possible pricing competition and patients who choose to delay treatment.