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What's Behind Gilead Sciences, Inc.'s 9.5% Rally in June

By Cory Renauer - Updated Jul 7, 2017 at 6:38PM

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Investors cheered a draft executive order intended to lower drug spending that would probably leave Gilead's bottom line untouched.

What happened

Shares of Gilead Sciences, Inc. (GILD -1.09%), a big biotech best known for its HIV and hepatitis treatments, perked up 9.53% in June according to data from S&P Global Market Intelligence. Investors viewed a draft of an executive order as a sign the Trump administration has no intention to enact drug pricing controls promised along the campaign trail.

So what 

Accusations that the pharmaceutical industry is "getting away with murder" followed by promises to take drastic action to lower drug prices justifiably made Gilead Sciences shareholders nervous. The company's hepatitis C antiviral treatment, Sovaldi, premiered with a list price of roughly $1,000 per pill and, along with several other drugs with seemingly outrageous prices, made the pharmaceutical industry a favorite whipping post for American politicians on both sides of the aisle.

pills stacked in the shape of an upward sloping stock chart.

Image source: Getty Images.

Despite tough talk about reigning in runaway drug prices, a draft of an executive order revealed last month contains little that would curb Gilead's pricing power for its market-leading antiviral treatments. For example, one proposal might force pharmacy benefit managers to pass on more of the rebates and discounts they wrangle from companies like Gilead to patients. This would probably benefit consumers but have little effect on drugmakers.

Now what

Rather than punish companies like Gilead for perceived capital offenses, it appears the administration is prepared to grant some of the industry's wishes. The executive order was drafted following discussions with Trump's Drug Pricing and Innovation Working Group, which happens to be headed by a former lobbyist for Gilead Sciences, Joe Grogan. One idea the group focused on concerns extending the patent life of drugs in foreign markets.

Another talking point that would do wonders for Gilead is a program that involves issuing 10-year U.S. Treasury bonds directly to drug manufacturers to help Medicaid and Medicare pay for pricey hepatitis C treatments. Hepatitis C can take years to present life-threatening symptoms, and at the moment, just a tiny sliver of those infected have received treatment. If the finished version of the executive order contains such a provision, it would deliver a tsunami of profits to Gilead's doorstep.

Cory Renauer owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: long August 2017 $75 calls on Gilead Sciences. The Motley Fool has a disclosure policy.

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