The past month hasn't been kind to shareholders of Gilead Sciences (GILD -0.65%). After the stock reached an all-time high of $116.83 in November, shares have now fallen over 10% in roughly a three-week span. What's more, investors and hedge funds alike have begun piling into Gilead's chief rival on the hepatitis C front, namely AbbVie (ABBV 0.54%). The net result has been two stocks moving in drastically different directions:
Cutting to the chase, this exodus out of Gilead reflects the growing concern that AbbVie might decide to significantly undercut Harvoni's $94,500 price tag, with its hepatitis C regimen of Viekirax plus Exviera, in order to curry favor with payers. Payers, for their part, have fanned these flames by publicly pleading with AbbVie to do so, even stating that the current price tags of Gilead's hep C drugs are "unsustainable."
While I have no idea whether AbbVie will go this route or how it would ultimately affect Harvoni's commercial performance, I do believe Gilead is a great long-term pick up following this dip. Here's why.
Harvoni probably won't be wiped off the map by competition
The hepatitis C drug game has been marked by disruptive new therapies that go on to eventually completely displace their older counterparts. For example, Vertex Pharmaceuticals (VRTX -0.80%) saw sales of its hepatitis C therapy Incivek plunge by 99% in the wake of Sovaldi's approval. And Johnson & Johnson's (JNJ -2.13%) Olysio is also expected to meet the same fate following Harvoni's approval.
Harvoni is a different animal altogether, though, With functional cure rates of 94% for genotype 1a patients, it's going to be hard to make a better mouse-trap, so to speak. The only angle left is for future therapies to lower the treatment duration. And so far, this approach hasn't worked out so well, as shown by the failure of Merck & Co.'s (MRK -0.90%) experimental therapy last month. In sum, AbbVie's rival therapy may gain some points on the pricing front, but I don't see it gaining the lion's share of the market over such a potent new therapy.
Gilead's pipeline is a sight to behold
Gilead's string of successful acquisitions over the past decade has given it one of the most promising clinical pipelines in the business. Specifically, Gilead has clinical trials under way for at least six potential blockbuster indications, such as non-alcoholic steatohepatitis and a host of blood-based disorders, just to name a few. The monoclonal antibody Simtuzumab, in particular, looks like it could be a megablockbuster in the making, based on its diverse clinical trial program (assuming that it succeeds in the clinic).
Even so, I am doubtful that the market is placing much value in either Simtuzumab or Gilead's superb pipeline in general, given the stock's price-to-earnings ratio of a mere 18. Most of Gilead's peers are currently garnering much higher premiums, suggesting that relatively little value is being assigned to this top-notch pipeline.
Why I'm keeping the faith
Watching a stock lose 10% in a month can be painful, especially when the underlying business seems to be going gangbusters. This is one of the main reasons taking the long view is so important. I'm not concerned about where Gilead's share price will be in a month or even a year from now. As a long-term investor, I'm more interested in how management is growing the clinical pipeline to create deep value, which is a task they've excelled at thus far. With multiple potential blockbusters in tow, top-notch management, and a strong balance sheet, I haven't lost any sleep buying more Gilead on this dip.
