Is this Gilead's Biggest Risk?

Gilead looks gilded right now, but could the company's huge success threaten its future?

Jun 13, 2014 at 5:00PM

I'll get right to the punch line.

Gilead Sciences (NASDAQ:GILD) revolutionary approach to hepatitis C brought in an eye-popping $2.3 billion in its first quarter. If all goes as planned, sales could reach $9 billion by 2017, on target to make Sovaldi one of the best-selling drugs of all time.

So let's dream a little bit. The knock on Gilead has always been its over-reliance on its HIV pipeline. But if all the hepatitis C infections were eventually treated at Sovaldi's list price, Gilead would make an amount that makes the $2.3 billion last quarter look tiny. 

Time to break out the pretzels and beer? Not quite yet.

Here's the downside. Sovaldi's incredible success could be planting the seeds of Gilead's downfall. The drug's pricing--$84,000 over the 12-week course of treatment--has had such a massive and disruptive impact on the insurance and medical industries, the company risks becoming a victim of its own success.

In fact, Sovaldi poses a huge riddle for Gilead. How can a $1,000 pill designed overwhelmingly for those who are low-income, or live in low- income countries, become accessible to the patients who need it most?

In the United States, more than half of the three million infected with the virus are on some form of guaranteed federal medical assistance, be they prisoners or Medicaid-recipients. That's why, ever since Sovaldi was approved at the end of December, lawmakers have been worried it could be the final straw laid on the taxpayer's back.

Anger is mounting internationally, and Gilead is taking note. The danger Sovaldi's success poses was by far the most significant risk in the company's 10-Q filing. Gilead must maintain or continue increasing sales of Sovaldi, the filing stated, otherwise "our results of operations may be adversely affected."

Just a few days ago, John Milligan, Gilead's COO, elaborated further. At the William Blair stockholders' meeting in Chicago, Milligan frankly admitted that the 30,000 patients treated with Sovaldi in Q1 were more than the company had originally estimated. He also said that Gilead was going through "pricing and reimbursement discussions across the European Union."

Here's what's likely keeping Milligan up at night. Since Sovaldi is essentially a cure, Gilead has to keep finding new hepatitis C patients to treat if it wants to keep posting incredible sales. And those new patients must be able to pay for the drug, or have their insurers pay for it. And with the continued payer pushback in the U.S., that may become a bit of a problem.

This problem will be ongoing every quarter, confounded by different factors (including increasing competition over the long term). In the near term, Gilead faces a risk doctors may choose to wait to treat hepatitis C patients until later in 2014, when the fixed-dose combination Sovaldi + Ledipasvir becomes available.

At the very least, the need to find all those new patients each quarter will make Gilead's quarterly numbers lumpy. And the ride for Gilead investors? A roller coaster.

The long-term picture
So why am I long Gilead? No one has a crystal ball. But despite significant payer pushback, drug pricing in the United States has yet to become vulnerable, and I believe that story is still intact.

Gilead's competition apparently agrees with me. Merck & Co.(NYSE:MRK) just paid a staggering $3.85 billion for Idenix Pharmaceuticals (NASDAQ:IDIX) despite the fact its hepatitis C drugs are still in early stages of development. The deal is a gambit to offer a competitive hep-C therapy. But with that kind of a price tag for a small, clinical-stage biotech, Merck is more or less admitting they must immediately shore up their arsenal of potential drugs for hep C, or concede the market to Gilead.

Idenix's most promising drug is Samatasvir, a drug in phase 2 that could easily fall into the same pit that made Bristol-Myers scrap Inhibitex's therapy after they paid $2.5 billion for it. At best, Samatasvir has a long pathway to commercialization in front of it. Gilead, for instance, acquired Sovaldi when it bought Pharmasset for $11 billion in 2011, but was not able to begin selling Sovaldi until Q4 2013.

The American way: tax and prescribe
Gilead is sensitive to anger about Sovaldi's pricing--outside the United States. The drug sports the usual tiered pricing scheme. U.S. patients and their insurers pay the most. In Europe, Sovaldi is significantly reduced. Right now, Gilead is talking to generic drug-makers in India about setting Sovaldi's price at $2,000 per treatment course, or 2% of the U.S. price for 60 low-income companies.

Gilead has other catalysts coming this year. But bottom line, nothing in Gilead's pipeline will rescue the stock if the company is forced to lower prices in the U.S. and shrink its Sovaldi windfall.

Will that happen? I seriously doubt it. After all, the costs of paying for liver failure are much higher than curing hep C.

Hepatitis c is one of the most common and dangerous viral epidemics afflicting mankind, and there's no real competition for Sovaldi yet (although AbbVie's drug may come on line relatively soon). That puts Gilead were stockholders need it to be -- squarely in the driver's seat. Watch Sovaldi sales moving forward, but I'm still excited about the stock's potential.

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Cheryl Swanson owns shares of Gilead Sciences. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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