Equity Research Health Care \ SEPTEMBER 8, 2020 Multiple vaccines may warrant Emergency Use Authorization (EUA) in Q4:20 due to political pressure, but the durable immunity data needed for full approval will be a more difficult hurdle. Market opportunity for vaccines is significant from $3B in FY21 and $4.3B in FY23. Government agreements secured ~3B doses globally. We view PFE/BNTX as most promising. We project GILD's Veklury revenue of $3.6B, $2.1B, $1.4B, $1.0B, and $750MM for 2020-'24. Antibody therapy may have prophylactic and therapeutic roles. Competitive space could reach $2.9B in FY21 and $1.1B in FY24. REGN/RHHBY's cocktail is regimen to beat. Yaron Werber, M.D. 646 562 1415 [email protected] Leo Ai, Ph.D. 646 562 1419 [email protected] Steve Scala, R.Ph., CFA 617 946 3923 [email protected] Phil Nadeau, Ph.D. 646 562 1336 [email protected] Joshua Jennings, M.D. 646 562 1333 [email protected] Boris Peaker, Ph.D., CFA 646 562 1377 [email protected] COWEN EQUITY RESEARCH September 8, 2020 This page left blank intentionally. 2 COWEN.COM EQUITY RESEARCH SECTOR NOTE September 8, 2020 ■ Health Care BREAKING COVID-19 CURVE WITH VACCINES & ANTIBODIES - AHEAD OF THE CURVE SERIES Yaron Werber, M.D. THE COWEN INSIGHT 646 562 1415 One or more vaccines may be approved for emergency use in Q4:20, but access for general [email protected] population is the more relevant economic catalyst and likely to occur in H1/mid-’21. Leo Ai, Ph.D. Antibody therapies will have major role supplementing vaccines. We expect both modalities 646 562 1419 to generate significant revenue in FY21 ($3B and $2.9B, respectively). PFE/BNTX’s vaccine [email protected] and REGN/RHHBY’s cocktail are most promising. Steve Scala, R.Ph., CFA 617 946 3923 Transitioning From the End of the Beginning to the Beginning of the End [email protected] A return to normalcy and its associated economic recovery hinges on successful Phil Nadeau, Ph.D. prophylactic and therapeutic treatments for COVID-19. Though much of the political focus 646 562 1336 [email protected] has been on the potential for regulators to grant Emergency Use Authorization (EUA) to one or more vaccine candidate before the presidential election in November, we believe Joshua Jennings, M.D. investors should focus on the timing of full approval and the subsequent rollout to the 646 562 1333 general population. [email protected] Recent reports noted that the four leading COVID-19 vaccine makers will issue a statement Boris Peaker, Ph.D., CFA reaffirming their commitment not to file for EUA until they have sufficient clinical data from 646 562 1377 [email protected] ongoing Phase 3 studies. This could delay the EUA timing to after the election and into year- end. Based on the neutralizing antibody (nAb) and T cell data in the early trials and initial manufacturing capacity, we believe at least one EUA in Q4:20 is likely and will allow vaccination of the most vulnerable patients first (e.g., people with ³2 co-morbid conditions, hospitalized and nursing home patients in regions with high case counts). While this is a positive for society, we do not expect it to be a catalyst for economic activity (though the market is likely to welcome it as a sign that vaccine trials are on track for success). ACIP Sets Stage For Vaccine Rollout – Vote Expected On September 22 Ahead of VRBP Advisory Committee Meeting On October 22 Based on the CDC’s Advisory Committee on Immunization Practices (ACIP) initial recommendation following its public hearing on August 26 about the plan for vaccine rollout, the first phase will offer vaccination to 25-26M people while the second phase will extend that to 45-50% of the U.S. population. Phase 3 will roll out to another 40-45% of the population. A vote on this interim prioritization scheme is expected on September 22 for approval ahead of CBER’s Vaccine & Related Biological Products (VRBP) advisory committee meeting scheduled for October 22 to discuss COVID-19 vaccines. What We Don’t Know Can Hurt Us – Key Question Is Sustainability Of Protection After The Initial Early Period Post Vaccination Data from patients who have recovered from COVID-19 show that nAb levels against the virus peak within 3 months and then decrease. This naturally raises the question of whether developing an effective vaccine is possible. The key question for full approval of COVID-19 vaccines is whether the duration of immunity will be sustainable after the first 3 months. This is critical because when nAb levels fall, there is a risk for vaccine dependent enhancement (VDE) (aka antibody dependent enhancement or ADE). Meaning that the vaccine-generated antibodies become insufficient to confer protection but theoretically can facilitate viral entry into immune cells and lead to increased severity among infected patients compared to placebo by helping the virus infect the person. While we believe that the risk of VDE is relatively low (our base case is that vaccines are generally tolerable and safe), the need to prove safety beyond the initial few months will translate to full FDA approval no sooner than Q1:21. 3 Please see pages 180 to 182 of this report for important disclosures. COWEN.COM COWEN EQUITY RESEARCH September 8, 2020 FDA’s 50% Efficacy Threshold for COVID-19 Vaccines Balances Achievability and Usefulness As outlined in a guidance document in June 2020, the FDA will require vaccine trials to show >50% efficacy above placebo in the primary endpoint, with the lower bound of the confidence interval above 30%. These thresholds were chosen based on the belief that they are high enough for consumers to agree to take a vaccine yet not so onerous that developers would need years to refine their candidates. In comparison, many approved vaccines have demonstrated far higher efficacy, such as measles (97% effective), pertussis (85%), HPV (90%), and polio (99%). But these vaccines took over a decade or more to develop. The flu vaccine, which is 50% effective in a good year (only 29% effective in the 2018-‘19 flu season), provides perhaps a more reasonable benchmark. We Believe Multiple Vaccines Will Clear 50% Efficacy Hurdle for Full FDA Approval in Q1:21 Phase 1 and 2 vaccine studies have consistently generated nAb titers in excess of convalescent sera, including the candidates from Moderna, Pfizer/BioNTech, AstraZeneca/ Oxford and Novavax, among others. We view the FDA efficacy requirement for approval as highly achievable since the common primary endpoint among the ongoing Phase 3 studies is prevention of symptomatic COVID-19 cases. Though the higher bar of prevention of infection (aka full protective immunity) is preferable, prevention of symptomatic cases is sufficient given the urgent societal need. In line with our base case, Dr. Anthony Fauci stated in early August that a vaccine could end up being only 50-60% effective. In addition, Moderna has powered their Phase 3 trial to achieve 60% efficacy over placebo. We believe that 50-60% efficacy, when combined with some persistent protective public health measures (masks are unlikely go away for the time being) and the current level of herd immunity (not fully known but may be in the 10-20% range in several regions), will be sufficient to provide confidence to return to normal activity. One risk to this view is the potential for public distrust of vaccines and low levels of inoculation if the approval process is viewed as too politicized and rushed; this is even more reason for the FDA to wait for at least 6 months of data before issuing an approval. The FDA advisory panel meeting on October 22 to discuss COVID-19 vaccines will be a key event to watch, particularly regarding clarification and/or updates regarding the requirements for full approval. Allocation to the General Population Not Likely Until Q2/Mid-’21 Given Overall Need Post approval, vaccines are expected to be rolled out in phases according to the Advisory Committee on Immunization Practices (ACIP) recommendations. Based on the expected ACIP framework for allocation, we expect a vaccine to be available for high-risk populations immediately after Q1:21 approval, followed by distribution to the general population in Q2/ mid-’21. Using influenza vaccine penetration as a guide, we estimate peak penetration in increased risk individuals to be ~65%, with peak penetration in the remaining population to be ~30%. Despite Pricing Pressure, We See Vaccines Peaking At $4.3B in FY21 With $20B In Cumulative Sales Over Several Years Vaccines are likely to be significant profit drivers despite low initial pricing based on sizable opportunity and potential for the virus to be a recurring annual threat. Thus far, the U.S. government has secured 800M initial doses (though not all vaccines may succeed) with contracts ranging from $4 to $20 per dose. While it is possible that future pricing will be higher (Moderna has made the case for $32-$37 per dose of its vaccine for “smaller- volume” agreements but just agreed to sell 100M doses for $1.5B excluding another $955M in funding from BARDA), there will be bipartisan pressure to keep prices down, especially for drug makers that have accepted development funding. Our base case scenario assumes a bolus of vaccine sales in FY21-24, generating peak US and EU vaccine revenue of $4.3B in FY21 before declining to $600M in FY26. The total of vaccine sales in FY21-FY33 is estimated to be $20B. 4 COWEN.COM COWEN EQUITY RESEARCH September 8, 2020 Initial Pivotal Vaccine Data Expected Q4:20, We Believe Pfizer/BioNTech Vaccine Is The Most Promising Candidate So Far Moderna, Pfizer/BioNTech, AstraZeneca/Oxford, Inovio, CanSino, Sinovac, and Sinopharm are currently in Phase 2/3 or Phase 3 clinical trials and we expect interim data from each in Q4:20.