How times change.
After a massive price ramp-up, Gilead Sciences (NASDAQ:GILD) hit the skids through most of 2015 and 2016 as its hepatitis C, or HCV, portfolio reported falling sales. And it's hard to blame the market for its critical reaction: In its third-quarter earnings, Gilead reported that HCV revenue had plummeted by a shocking 31% year over year.
The patients who were most excited for the HCV cures Gilead bought, developed, and marketed got treated quickly, and now the biotech is scrambling to find more people to treat. Management has been talking for some time now about finding a new normal -- a revenue number that the HCV division can sustain over the long haul.
The key question for shareholders: Has Gilead gotten there?
No one can predict the future. But here's what I'm seeing -- the good and the bad.
Plateauing patient starts
Gilead Sciences' shareholders -- of which I am one -- certainly have plenty of good news to cheer about. Even as year-over-year revenue plummeted last quarter, the underlying number of Americans treated for HCV by Gilead has flattened. I'll turn to Gilead COO Kevin Young, who noted last quarter (quote courtesy of S&P Global Market Intelligence):
"Approximately 61,000 people in total began HCV therapy in the U.S. in the third quarter 2016. This represents the fourth consecutive 3-month period where patient starts have been in the 50,000 to 60,000 range."
That is, without a doubt, good news. It means that Gilead may have finally hit a steady state in U.S.-treated patients. Unfortunately, the same is not true of Europe and Japan -- lower patient starts were called out in both regions last quarter, so there's reason to believe that sales in both areas (flat year-over-year in Japan at $452 million, and down 30% in Europe at $604 million) still have a ways to go before similarly plateauing. Gilead isn't out of the woods yet.
Pricing: The double-edged sword
A sales number has two components: volume (which I just addressed) and price. And it isn't clear that Gilead's pricing has bottomed out -- or will anytime soon. While competing drugs like Merck's Zepatier and AbbVie's Viekira Pak haven't significantly eroded Gilead's market share -- which stood at over 85% last quarter -- they have forced Gilead to reduce prices.
As the competitors fight for space on insurance formularies, I have every reason to believe that the pricing wars will continue. One of Gilead's key strategies for undermining the competition is promoting Harvoni as an eight-week treatment option for some HCV genotype 1 patients. That shorter duration will both save insurance companies money and ensure better patient compliance. Harvoni is usually a 12-week drug, so even if Gilead keeps the same price per pill, it'll take a 33% pay cut for every patient it treats for eight weeks instead of 12.
And yet, lower prices are enabling Gilead to preserve its market share -- and they're opening up opportunities in treating patients covered by public payers such as Medicaid. The agencies running those programs are incredibly price-conscious, and so this is Gilead's opportunity to profitably cure hundreds of thousands of people. You can tell that it's working: Roughly 45% of the patients Gilead treated in Q3 came in through public payers, with the remaining 55% coming in through Medicare Part D or commercial insurance, compared to just 30% of patients coming through public payers in Q2 of 2015.
So, cutting the price is boosting volume -- enabling some of that plateau in the U.S. that I mentioned above -- but hurting revenue per patient.
Two more shots in the chamber
When the opposition has comparable drugs -- as is the case for Merck (AbbVie's drug is inferior due to its side effects and complicated treatment regimen) -- and you're in a price war, the remaining option is to create new, better drugs.
Enter Gilead drugs Epclusa and SOF/VEL/VOX. The genius of Epclusa is that, unlike the other drugs, it's truly pan-genotypic. It can combat and cure HCV no matter what type someone has, nor what stage the disease is in. That's a big benefit, especially given that many health systems (particularly in the developing world) may not have good access to genotype testing. Epclusa was approved on June 28, 2016 -- so Q3 was its first full quarter on the market. And, at $640 million in sales in that first quarter, it did not disappoint.
SOF/VEL/VOX looks like it will be targeted primarily toward the relatively small percentage of people (according to clinical trial percentages, likely no more than around 5% of patients) who have failed one of the direct-acting antivirals I listed above. That's a unique niche, and given that many of the patients who have taken these drugs to date have been very sick, demand will probably be immediate -- and premium pricing could follow. That assumes the drug is approved by the Food and Drug Administration, of course, but Gilead has reported impressive data and submitted a New Drug Application to the FDA, so we'll probably get more clarity on a timeline in the coming months.
I don't think Gilead's HCV sales have hit bottom yet. With 2017 negotiations complete, I would be shocked if Gilead hasn't made more concessions on price -- and isn't working with insurers to move more genotype 1 patients to eight-week Harvoni treatment. That said, Epclusa and SOF/VEL/VOX are good long-term plays and should gradually help Gilead ramp up sales over the long term. In the meantime, there are plenty of reasons to like Gilead Sciences, and I'm excited for what we'll learn when it reports Q4 earnings in February.