Please ensure Javascript is enabled for purposes of website accessibility

The Drug-Price War Just Took a Big New Twist

By Cheryl Swanson – Jul 27, 2016 at 10:21AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

As states and insurers are forced to unlock access to pricey hep-C wonder drugs, the wind may be shifting in favor of biotech and pharma investors.

Image source: Flickr.

Is your stomach ready for a big twist? Then you should know that the escalating battle over drug prices just got turned on its head. 

For the past couple of years, states and insurers have successfully blocked patient access to many game-changing drugs because of their sky-high prices. While cancer-specific biotechs are not the only drugmakers affected, no class has taken a bigger hit than those providing next-generation treatment for hepatitis C at nosebleed prices.

Specifically, we're talking about Gilead Sciences (GILD 0.98%), AbbVie Inc. (ABBV 0.14%), Merck & Co., Johnson & Johnson, and Bristol-Myers Squibb. These companies' drugs eliminate the virus 90% of the time, but can cost anywhere between $54,600 to $94,500 for a course of treatment.  

Hep-C is a life-threatening disease, so blocking access to these drugs could hurt many patients. The blocks are also stinging investors, many of whom thought these drugs would blast past analysts' estimates for a long time to come. After all, even if you consider just the Medicaid portion of the hep-C market, sales were projected at $55 billion. Add in the rest of the market, both home and abroad, and how could a company like Gilead not be a huge winner for the foreseeable future?

Ouch! Who shrank the market?

Instead, the hep-C juggernaut ran into a huge roadblock -- or, rather, a series of roadblocks. Even though Medicaid patients are prime candidates for the drugs, many states have refused to pay for them. Molina Healthcare (NYSE: MOH), for example, which administers Medicaid plans, found itself receiving no reimbursement for the expensive antivirals in 11 states . Not surprisingly, Molina reacted by providing coverage only when the disease was in its final stages, Stage 3 or 4, where the liver is "hard as a rock," as Sanjeev Arora, a New Mexico physician, describes it. Arora further described treatment at that stage as "like closing the barn door after the horse has left."

The erosion of the Medicaid market was devastating enough, but commercial insurers also jumped on the bandwagon. Back in 2014, UnitedHealth Group (UNH 1.49%) limited the antivirals to patients facing liver failure. Other insurers followed suit.

The upshot for investors is that market leader Gilead's double-digit sales and profit growth came to a screeching halt last quarter, with its hep-C drug Harvoni badly missing expectations. AbbVie's chief competing hep-C drug, Viekira, also came up well short of consensus estimates.

In fact, many analysts are now projecting that the hep-C market won't just flatten; it's headed for a cliff.

Don't bet on it: Floodgates are reopening

So much for analysts' projections. The hep-C world is about to change, again. Massachusetts is the latest state to reverse its policy. A few weeks ago, after losing multiple legal battles, the state threw in the towel and conceded that any Medicaid patient with hep-C qualifies for the antiviral drugs.

Massachusetts is just one state, but similar actions have occurred in Florida, New York, Washington, and Delaware in the past few months. Pressured by an almost endless list of advocacy groups, insurers are also breaking down. Anthem's (ELV 1.32%) Blue Cross and Blue Shield plans in 14 states quietly reversed course and began authorizing treatment to people "in all stages of fibrosis" (liver scarring) last December. UnitedHealth did an about-face on Jan. 1. The nation's largest insurer now provides greatly expanded coverage for these drugs.

And not just states and insurers are reopening the floodgates. In March, the Department of Veterans Affairs said it will treat any veteran with hep-C with the new drugs, regardless of the stage of illness -- extending therapy to nearly 130,000 veterans.

Even more stunning, Medicare followed their lead. In the face of a challenge by an Arizona man named Walter Blanco, who was twice denied access, the agency recently enacted a similar policy.

Hep-C investors are still in for volatility

But while easier access to therapy is great news for all hep-C drugmakers, don't expect an immediate big bump in revenue for any of them.

For one thing, states will demand deep pricing discounts. Gilead has already been forced to discount its average hep-C drug by almost 46%, and state-negotiated discounts are likely to be greater. They could bring pricing down to $30,000 or less, according to Kevin Costello, from Harvard's Center for Health Law & Policy Innovation.

Second, as many as 50% of hep-C patients aren't even aware they have the disease.

Third, one company still almost completely dominates this market, with AbbVie a distant second. Gilead owns 90% of the market, and the recently approved Epclusa, which can treat all six genotypes of hep-C, should keep it the front-runner.

Best investing bets? Biotechs providing drugs that are "medical necessities"

Beyond hep-C, the recent events have implications for all biotech and specialty pharma investors. With healthcare costs soaring, pharmas developing me-too drugs that offer marginal benefits are in trouble. Something's gotta give, and these drugs are likely to be destined for payers' chopping blocks.

A better bet are companies providing drugs that are medical necessities. Restrictive policies against those drugs probably won't survive the legal challenges, according to Nicholas Bagley, a professor of law at the University of Michigan. "I think the writing is on the wall, and plaintiffs are likely to prevail in these lawsuits," he said.

In other words, despite their extreme prices, companies with drugs that save lives should find the wind at their backs again soon. And if you're looking for one good pick based on this trend, there's really no choice. Market leader Gilead is now trading at a stupid cheap forward earnings multiple of 6.95.

Here's the bottom line: Tens of thousands of people with hep C are about to gain access to treatments that can cure them. I'd say that's good news for everyone. And it doesn't hurt that this twist in the wind may eventually add a lot of lift to some well-chosen portfolios.

Cheryl Swanson owns shares of Johnson and Johnson. The Motley Fool owns shares of and recommends Gilead Sciences and Johnson and Johnson. The Motley Fool recommends Anthem and UnitedHealth Group. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Gilead Sciences Stock Quote
Gilead Sciences
GILD
$86.26 (0.98%) $0.84
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$177.24 (0.13%) $0.23
UnitedHealth Group Stock Quote
UnitedHealth Group
UNH
$537.62 (1.49%) $7.91
Elevance Health Inc. Stock Quote
Elevance Health Inc.
ELV
$513.86 (1.32%) $6.70
AbbVie Stock Quote
AbbVie
ABBV
$159.62 (0.14%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.