Arguably no biotech stock thrilled investors in 2014 more than Gilead Sciences (GILD 0.07%). Gilead finished the year up 26%, about double the performance of the broad-market indexes, and the approval and exceptional launch of hepatitis C drugs Sovaldi and Harvoni was cause for much excitement.
Quality of care takes a giant leap forward
As a quick history refresher, as recently as 2011 the standard of care for hepatitis C, a progressive disease of the liver that can lead to complications and death, was the combination of interferon and ribavirin. This combo worked about half the time in ridding a patient of detectable levels of HCV, and it had many unpleasant side effects, including rashes and flu-like symptoms. Then in 2011, Vertex Pharmaceuticals introduced Incivek, a pill that eliminated detectable levels of HCV in nearly 80% of patients, but it still had to be administered with interferon and ribavirin.
Source: Gilead Sciences.
Gilead's Sovaldi was a quality of care breakthrough. It can be administered to genotype 2 & 3 HCV patients, and it doesn't have to be taken with interferon, thus eliminating the flu-like side effects. Harvoni, a cocktail drug including Sovaldi and ledipasvir, is given to genotype 1 patients and can be administered without interferon or ribavirin. Furthermore, in most instances these two HCV drugs boosted the sustained virologic response to 90%-plus!
It probably comes as no surprise then that Sovaldi racked up $8.55 billion in sales during its first three quarters on the market. It is, without question, the most impressive and successful drug launch in history, and it made Gilead a stock to own in 2014.
3 ways Gilead could get throttled
I freely admit that I'm a Gilead Sciences bull. I like the long opportunity moat that HCV treatment provides even with multiple players in the space. However, I'm a realist as well. Every stock has headwinds it needs to overcome -- even Gilead. Here are three scenarios that could cause Gilead's shares to lose a substantial amount of their value.
1. Congress takes action
Americans' health care costs are the highest in the world. Comparably speaking, health expenditures on a per capita basis in 2011 were 156% higher in the United States than in the 34-country OECD average. There are a number of reasons why we're No. 1 in health care expenditures, but high prescription costs is certainly near or at the top of the list.
Source: OECD Health Statistics, 2013, WHO global health expenditure database.
Within the U.S. there's little bickering among insurers, pharmacy-benefits managers, and Congress over the pricing of drugs. If a drug developer comes out with a five- or six-digit annual price tag on a drug, most are willing to accept it. Gilead's Sovaldi and Harvoni, for example, run $84,000 and $94,500 over a 12-week treatment course.
Overseas governments and regulatory agencies aren't as forgiving. In 2013, India placed price caps on 30% of the drugs sold within the country, and in July 2014 the National Pharmaceutical Pricing Authority noted it would cap the price of an additional 108 drugs in order to make them more affordable to India's citizens, many of whom don't have health insurance.
In Switzerland, the government also took a line in the sand approach with drug developers. For instance, it asked Roche to lower the cost on its cancer drug Perjeta to 20% below what it had been charging in select EU countries. Roche refused, and Switzerland simply removed it from the reimbursed drugs list.
It's possible that Congress could follow a similar route. In an effort to halt drug price inflation and protect citizens and insurers, it could implement price caps on developed drugs, or perhaps institute other value-added measures that determine how much should be charged by a drug developer based on how much a drug measurably helps a patient. Sovaldi and Harvoni are clearly helping patients, but it's arguable that the drugs are not worth $84,000 and $94,500 per year.
The downside to these price caps is that they could discourage innovation. Big pharma thrives in the U.S. because of the ability to net high prescription prices. Any capping of those prices could lead to pharmaceutical companies looking elsewhere for their next research facility.
2. A more effective drug hits the market
Both Gilead's Sovaldi and Harvoni, as well as AbbVie's recently approved Viekira Pak, are highly effective treatments. In studies, these drugs led to between a 90% and 100% sustained virologic response, or SVR, with most data culling around the mid-90% area.
Source: Merck & Co.,
But, this still means there's a margin for improvement since not every patient achieved a complete SVR. Thus, the second way Gilead's dynamic duo could run into trouble is with the emergence of a superior HCV treatment.
While that might seem like a long shot now, consider just how far we've come just since 2011. In four years we went from a 50% cure rate to a 90% or better cure rate. In another five to 10 years we may be looking at 100%. The question is, will Gilead's duo still play a major role then?
Don't forget that companies like Merck are pushing hard to enter the HCV field with novel drugs. Merck's combo of MK-5172 and MK-8742 announced an SVR of 98% this past April, and the addition of Idenix Pharmaceuticals' product pipeline to its own could allow for a handful of new and/or combo therapies to emerge.
Additionally, it's not just the cure rate Gilead has to worry about. If another treatment comes along which can get the job done at a 90% SVR or higher in a shorter time span, say four or six weeks, then Gilead could see its sales vanish quickly. Its peers certainly are looking at shorter treatment durations, but luckily for Gilead none have succeeded thus far.
Put simply, two or three companies aren't going to cure the estimated 180 million people around the world with HCV overnight, so Merck and its peers have plenty of time to develop a superior HCV drug.
3. A price war commences
Lastly, Gilead could find itself in big trouble if equally effective treatments emerge which are priced at a discount to Sovaldi and Harvoni.
Source: Express Scripts.
Last month we witnessed AbbVie and pharmacy-benefits manager Express Scripts strike a deal whereby Express Scripts' eligible customers who are HCV genotype 1 will exclusively receive Viekira Pak. In return, Express Scripts will receive a "significant discount" off of Viekira Pak's marketed price of more than $83,000. Investors are currently worried about how this deal might affect Gilead, but I'm not too terribly concerned, as this is a sticky instance where consumer choices are being decided for them by the PBM. I suspect this has the potential to backfire on Express Scripts, especially with some patients still needing to take ribavirin as part of Viekira Pak.
Instead, I'd be concerned about Merck, Johnson & Johnson, or another major player introducing a highly effective genotype 1 drug that can be taken without interferon or a ribavirin that prices at $60,000 to $70,000 per treatment course. We know Gilead's therapy works well, but we also know that consumers really dislike spending their money on prescription products.
For instance, AstraZeneca's FluMist is just as effective as a standard flu shot, but because it's a nasal spray and less painful than a shot, it costs $1 to $15 more than a traditional flu shot. You might assume people would pay a few bucks extra for that convenience, but you'd be wrong. FluMist has been a major sales disappointment while standard needle-based vaccines continue to thrive.
Consumers care about price and choice. When you allow the consumer a few options they'll tend to gravitate toward the cheapest one. As more treatment options become available, it's possible Gilead's profitability could take a big hit if it gets involved in a price war.
