5 reasons why Kite's CFO probably shouldn't have talked price yet

Friday, 16-January-2015

 

The CFO of Kite Pharma (Nasdaq: KITE) made some news yesterday when she mentioned in a Reuters story that Kite's internal financial models assume a base case price for their CAR-T therapy of $150,000.  It is unique, to say the least, for a company like Kite that hasn't even started pivotal trials yet to be speaking on the record about price this early.  Kite’s first therapy is unlikely to be approved until 2017 at the earliest.   

 

This is also likely to be taken as bad news for Kite’s stock, since most investors assume a base case scenario of something more like $250,000-$300,000+.

 

The article’s main point is that companies are thinking about pricing, and opening a dialogue with payers much earlier these days after Gilead Sciences (Nasdaq: GILD) angered many payers with an initial $84,000 price for its hepatitis C drug Sovaldi.  As we all know, this has recently led Gilead into an unprecedented competition with AbbVie (NYSE: ABBV) to earn placement on formularies at pharmacy benefit managers.

 

While I agree with Kite’s overall idea that the environment out there requires you to start speaking with payers about pricing as early as possible, I do not think there is anything to be gained by going on the record publicly with a specific number.  In fact, I personally think this was such a blunder that I’m guessing the CFO said it by accident (or without much thought).  Here are five reasons why I think it was unwise:

 

1.  It is simply too early to know what the cost/benefit will be.

 

As the article itself mentions, this $150,000 figure is just a base case.  The actual cost will likely be much different because it will depend on what Kite’s pivotal trials tell us about the therapy’s risk/benefit profile.  Given how those trials have not even started yet, and will not finish until 2016, why speak up now?  Furthermore, we do not know at this point what line of therapy Kite’s CAR-T will be for many types of cancer.  That will also affect pricing significantly.  The bottom line is that this pricing issue is complicated and will evolve over time based on many variables.  Saying anything now is not worth it and is very imprecise.

 

2.  Cost of goods sold for CAR-T is currently not well understood.

 

Kite is still in the early stages of investigating this therapy and has only treated dozens of patients so far.  They have no large scale manufacturing facility, and no experience as a commercial organization.  I highly doubt they have a great idea of what cost of goods sold (COGS) will be once they do start ramping up.  COGS is another important variable that will factor into price. 

 

Though CAR-T is very different than Dendreon’s Provenge, a lot of people like to draw manufacturing similarities since they both are autologous therapies.  While I’m not concerned CAR-T will run into the same economics, Kite should take heed of the way Dendreon was caught off guard by initial costs.  Believe it or not, Dendreon’s COGS was in excess of 100% in the beginning.  Kite needs to build a factory and start making product at a larger scale before they can know for sure what it is going to cost on average.  

 

3.  Kite’s executive team is not fully in place yet.

 

One reason why I think the CFO’s statement was probably said by accident is that Kite’s executive team is not fully in place right now.  It is premature to be saying things like this until they come to a consensus on strategy.  The V.P. of Communications only started on Monday, and the company’s new marketing chief does not start until next month.  It is the marketing chief who will be having these discussions with payers, and therefore he or she should have input into formulating the base price.  I doubt this person views it as an advantage to be going into those payer discussions with a price already out there in the public realm.

 

4.  It is unwise from a competition standpoint.

 

At this early stage, Kite benefits nothing from tipping off competitors to their internal financial models.  Novartis (NYSE: NVS) for sure will beat Kite to the market, and it is technically possible Juno (Nasdaq: JUNO) will as well.  Why allow those companies to go armed into their own payer talks with explicit information about what Kite’s thinking is?  This is like a poker player showing one of his or her cards to everyone at the table. 

 

Furthermore, how is it going to look if one of those competitors is able to negotiate a substantial price, and then Kite has to follow up with everyone knowing the $150,000 number is out there?  It puts them in a weaker negotiating position, and could result in a lower price.  They would have been better off doing this exactly like AbbVie, who publicly said they do not plan to compete on price and then negotiated everything with payers privately.

 

5.  This will always be on the record.

 

Keep in mind that if there is ever anger about the price of CAR-T in the future, this statement will always be on the record.  That won't earn Kite much goodwill.  As stated above, there are legitimate reasons why the price of the therapy will likely be much higher than $150,000, so setting low expectations is liable to let people down.  This could come back to haunt them

 

For example, the Senate Finance Committee in July asked Gilead for access to Pharmasset’s financial models because it was known that Pharmasset had lower pricing assumptions than Gilead.  Similarly, if Kite ever has to price higher, everyone is going to remember how they were originally modeling $150,000.  Anyone from Congress to payers might want a detailed explanation of what changed.


Conclusion

 

The bottom line is that I think there is a lot to lose by going on the record with a number right now, and almost nothing to be gained.  While it is smart to get out in front of the pricing issue with payers, this should be done privately and when armed with more information.  Kite needs to know a lot more about what its risk/benefit profile looks like, and what it will cost to make CAR-T before the company should be setting any expectations publicly.

Who Am I?

I'm an individual investor from Kansas City.  My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>

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