Is This Gilead's Worst Nightmare?

AbbVie's rival hepatitis C therapy could be a major thorn in Gilead's side. Here's why.

Jun 17, 2014 at 5:30PM

It's not often that big name biotechs double their earnings year over year. Yet that's exactly what Gilead Sciences (NASDAQ:GILD) did in the first quarter of 2014 after posting record sales for its new hepatitis C drug Sovaldi. 

Sovaldi raked in a reported $2.27 billion in the first quarter, accounting for 46.6% of total product sales in the quarter. Despite these impressive numbers, however, Gilead's management has opted not to provide investors with an annual sales projections for its new cash cow.

With the company's stock price failing to break through its historical and recent highs after a stellar quarter, I think it's important to take a closer look at one issue that could be clouding management's foresight regarding Sovaldi.   

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AbbVie's new drug could be a major competitor to Sovaldi for genotype 1 patients
AbbVie (NYSE:ABBV) and its partner Enanta Pharmaceuticals (NASDAQ:ENTA) submitted their triple-therapy hepatitis C cocktail for approval in the U.S. last April and followed that up with a European submission in May. The therapy is indicated as a treatment primarily for genotype 1 patients -- the most common form of the disease, and reportedly has a similar clinical profile compared to Gilead's drug for this particular patient population.

Specifically, six clinical trials showed that AbbVie's therapy produces functional cure rates typically exceeding 90% and relatively few patients needed to discontinue using it due to serious adverse effects. In short, the two drugs are more or less a toss up clinically speaking for genotype 1 patients.

So the deciding factor may come down to price for payers, who have vigorously pushed back against Gilead's pricing for Sovaldi. If AbbVie decides to undercut Gilead's $84,000 price tag for Sovaldi for a 12-week course of treatment, I think the floodgates could open in terms of demand for the new drug, assuming approval. 

Signs Sovaldi's price may be its biggest weakness
There is no guarantee AbbVie will price its therapy significantly below Sovaldi, and in fact management has implied that they aren't interested in competing on price, but the company would be wise to do so. Without a substantial difference clinically for genotype 1 patients, insurers could begin denying the majority of Sovaldi prescriptions in favor of AbbVie's drug if the company priced it at a substantial discount.

Indeed, we learned last month that several private insurers and even Medicaid have already begun restricting access to Sovaldi to only the sickest patients over pricing concerns.  And this pricing debate could be one reason why prescription rates have reportedly started to slow in recent weeks, although doctors might be simply waiting for the new Sovaldi/ledipasvir combo or AbbVie's drug as well.   

Foolish wrap-up
AbbVie and Enanta's triple-therapy hepatitis C regimen looks like it will be approved later this year in the U.S. and will therefore compete head-to-head with Sovaldi. I think this is why Gilead's management decided it was best to avoid an annual forecast.

Although AbbVie hasn't announced its potential pricing structure, we have heard rumors that the company won't undercut Sovaldi's price significantly.  In my view, this would be a major mistake on AbbVie's part and would seriously limit the drug's commercial potential.

Gilead already enjoys first-mover advantage with Sovaldi and is in the process of bolstering its all-oral hepatitis C product line with the Sovaldi/ledipasvir combo. Moreover, AbbVie's drug can't claim to be any more effective or safer than Sovaldi. All told, AbbVie's therapy would likely run into the same roadblocks from payers that Sovaldi is now, instead of using this pricing debate to its advantage. 

Overall, I am skeptical that AbbVie really plans on pricing its therapy in Sovaldi's stratosphere, largely because it makes little business sense to do so. Regardless, this issue could play a major role in Gilead's fortunes moving forward. 

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George Budwell owns shares of Enanta Pharmaceuticals. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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