Why You Can Expect Extra Volatility From Gilead Sciences, Inc. This Year

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When Gilead Sciences (NASDAQ: GILD  ) reported fourth quarter earnings after the market closed on February 4, a lack of guidance for Sovaldi hit a nerve. Despite a great year, and plenty of reasons to expect better times ahead, shares slumped the following day. Here's a look at how the actions of pharmacy benefit managers like Express Scripts (NASDAQ: ESRX  ) , and competition from Bristol-Myers Squibb, Merck (NYSE: MRK  ) , and AbbVie (NYSE: ABBV  ) are likely to keep Gilead's (NASDAQ: GILD  ) stock price on a roller coaster for the rest of the year.

Operation estimate
With less than a month on the US market, Gilead (NASDAQ: GILD  ) recorded over $139 million in Sovaldi sales during fourth quarter of 2013. Patient demand accounted for about $50 million. Filling the inventories of wholesalers added nearly $70 million, and a one time order for for a clinical trial from an unnamed customer tacked on $15 million.

Now, that's a pretty big month, but don't even bother annualizing that figure to estimate this year's total. Government and commercial payers take time to add new drugs to their formulary, even ones as important as Sovaldi. With a price tag of over $80,000 per patient for a 90-day supply, some foot dragging should be expected.

During the earnings call, management claimed the drug was given a higher copay tier typical of new specialist drugs. Gilead (NASDAQ: GILD  ) has a patient assistance program that, when allowed, will use foundation grants to help patients meet copay amounts. It's not unheard of for companies to fund their own foundations, then use them to help patients meet their copays.

The important takeaway here is that estimating sales for a drug like Sovaldi this early into its launch involves a great deal of guesswork. Just how much of an impact copay amounts and assistance programs will make is one of many unknowns factored into sales estimates.

Gilead (NASDAQ: GILD  ) management did provide a 2014 total sales range of between $11.3 billion and $11.5 billion, excluding Sovaldi, which is a fairly impressive increase of about 7% from 2013. If you include the average estimate of about $5 billion for Sovaldi sales this year, that's a one-year topline increase of over 50%. It's not hard to see why this stock doubled in 2013.

A drugmaker's nightmare
Copay amounts are important, but here's the biggest reason you can expect Gilead (NASDAQ: GILD  ) sales estimates to vary from week to week this year. Pharmacy benefit manager Express Scripts (NASDAQ: ESRX  )  intends to force pharmaceutical companies like Gilead (NASDAQ: GILD  ) and AbbVie (NYSE: ABBV  ) to compete on price for drugs that provide similar benefit. This sounds like a fair proposition, until you consider the consequences of losing, even by a little. Being left off a major formulary could easily bite a double-digit percent sized chunk from sales and send the stock price reeling.

Before forcing companies to compete, Express Scripts (NASDAQ: ESRX  ) has made it clear that their products' clinical benefit must be similar. Given the data available, it looks like nail biting time.

Couldn't be much closer
In December of last year, Gilead (NASDAQ: GILD  ) posted some outstanding phase 3 data for Sovaldi and its NS5A inhibitor ledipasvir combo treatment for patients with chronic genotype 1 (GT1) hepatitis C virus (HCV). The studies included a variety of patients with and without cirrhosis. Some had experienced previous treatment, and some hadn't. Of 1,518 patients, 95.9% showed a 12-week sustained virological response (12SVR). More impressive was a group of 109 treatment-experienced patients within the study that showed a 93.6% SVR12.

It looks like we'll get to see if Express Scripts (NASDAQ: ESRX  ) is serious about price competition for therapies with similar benefit. At the end of January, AbbVie (NYSE: ABBV  ) released results from phase 3 studies of its all-oral combination therapy. Like the Sovaldi/ledipasvir combination trials, these patients also suffered from GT1 HCV. Overall, 2053 patients showed a 96% SVR12. One treatment-experienced arm containing 91 GT1b patients showed a 100% SVR12.

More fun to come
Far behind AbbVie (NYSE: ABBV  ) and Gilead (NASDAQ: GILD  ) , Merck (NYSE: MRK  ) has a two-pill HCV combo that looks like it could be equally effective. In November of last year, the company released data from a 65-patient phase 2 study. All 11 patients in the ribavirin arm with 12-week data showed a sustained virological response. You definitely want to keep an eye open for phase 3 data from this combo.

Bristol-Myers looks like it might compete with the other half of Gilead's (NASDAQ: GILD  ) HCV combination with its own NS5A inhibitor, daclatasvir. In a study last month that included 41 patients who did not respond to other HCV protease inhibitors, the Sovaldi/daclatasvir combo raised some eyebrows with a SVR12 of 98%. Gilead (NASDAQ: GILD  ) intends to market its two-drug regimen as a single pill, so this could lead to all sorts of complications.

Final thoughts
If Express Scripts (NASDAQ: ESRX  ) makes good on its threat, it's hard to say just how low AbbVie (NYSE: ABBV  ) and Gilead (NASDAQ: GILD  ) will go to remain on the formulary. In Europe, Gilead (NASDAQ: GILD  ) has already succomed to pressure from payers. The 12-week treatment that runs $84,000 in the US, will go for $66,000 in Germany and $57,000 in the UK.

For Gilead's (NASDAQ: GILD  ) long-term investors, the important thing to remember here is that management's topline growth estimate of 6-8% excluding Sovaldi is impressive on its own. Although things might get very bumpy this year, that's hardly a reason to let go now.

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Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 12, 2014, at 11:59 PM, badeconomy wrote:

    Gild's competitors will only validate gild's products . Physicians are making the choice for the patients based on the quality of the medication . In regards to the price , physicians only prescribe medication that have the best percentage for the cure, patients only would want the best that their doctors recommend and Insurence companies if involved they would want the most cost effective rout so they would not risk rejecting the higher price medication for a chance of paying twice because the cheaper medication failed. We are talking about cure of a life threatening decease.

  • Report this Comment On February 13, 2014, at 2:03 PM, siteobserver wrote:

    GILD seems to drop when there is Hep C news from either ABBV or their partner ENANTA (ENTA), and rises on news related to Gilead's Hep C drug. Price competition from ABBV will begin this year since ABBV has announced that their Hep C treatment is expected to be approved and go on sale in 2014.

    One way to hedge against Gilead's ups and downs is to own ENTA which swings several points at a time and typically ENTA goes up when GILD goes down. ENTA is influenced by milestone payments - they just announced financials which were weak by comparison but only because there weren't milestone payments this past quarter. News that will drive ENTA up and drive Gilead down include announcement of FDA approval of the ABBV/ENTA solution, which has a 92-96% cure rate; then the pricing which could be competitive, will be another thing to watch for; and finally, any milestone payments to ENTA that may be announced. ENTA also has a MRSA treatment in trials which could be significant.

    I am an independent investor - last year I made more than 100% on my investments and this year I'm ahead of that pace.

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Cory Renauer

Cory is a long-term minded analyst mainly focused on the biotechnology and pharmaceuticals. He genuinely enjoys cutting through the industry's complexities to help everyday investors make better decisions. You can contact Cory on Twitter @coryrenauer

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