After boosting its full-year hepatitis C revenue guidance last month, Gilead Sciences' (NASDAQ:GILD) share price has been rallying. However, the Food and Drug Administration approved AbbVie's (NYSE:ABBV) next-generation hepatitis C drug Mavyret this week, and AbbVie has priced it to sell. Could Mavyret deliver a big blow to Gilead Sciences' hopes for higher hepatitis C sales?
A changing marketplace
Hepatitis C treatment has taken big steps forward over the past decade. Previous treatments including the side effect-causing drugs peg interferon and ribavirin have been replaced by next-generation drugs that deliver functional cure rates that are above 90% in as few as 12 weeks, and in some patients, as little as eight weeks.
Gilead Sciences is largely responsible for these advances in patient treatment. Its Sovaldi rolled out in early 2014 to fanfare because of its 90%-plus cure rates and 12-week treatment duration. Later that year, it also launched Harvoni, which delivered even higher cure rates and a eight-week treatment duration for about 40% of genotype 1 patients. At their peak, these two drugs were hauling in about $20 billion in annualized sales.
Gilead Sciences paved the road toward better treatments in this indication, but it wasn't the only company developing hepatitis C drugs. Johnson & Johnson, Bristol-Myers Squibb, AbbVie, and Merck & Co. spent big money on hepatitis C research, and all of them launched hepatitis C drugs too.
AbbVie's Viekira was the most competitive of these drugs because it competed fiercely on price. Gilead Sciences was forced to respond with its own discounts, and the resulting price war took a big toll on its sales, profit, and share price. Gilead Sciences' annualized hepatitis C sales have been more than cut in half from their peak, and that's caused shares to tumble from over $120 in 2015 to the mid-$60s earlier this year.
Recently, however, Gilead Sciences' share price has turned higher after management boosted its full-year hepatitis C sales guidance last month. Gilead Sciences' hepatitis C drugs enjoyed sequential sales growth in Q2, with U.S. sales increasing 13% and worldwide hepatitis C sales increasing 11%. As a result, management was able to increase its 2017 hepatitis C sales outlook to at least $8.5 billion, up $1 billion from its prior forecast.
A new challenger on deck
This week's FDA approval of Mavyret could crimp Gilead Sciences' momentum.
Mavyret can be prescribed to patients regardless of their genotype and in trials. It delivered an average functional cure rate of 97.5%. That cure rate appears to match up well against Gilead Sciences' hepatitis C drugs, but what could really threaten Gilead Sciences' market share is Mavyret's price and its shorter treatment duration.
Mavyret's list price is only $13,200 for four weeks of treatment, and for comparison, Evercore ISI calculates that Gilead Sciences' two newest hepatitis C drugs -- Epclusa and Vosevi -- cost about $25,000 each for four weeks of treatment. Mavyret's cost advantage is even bigger when you consider that Mavyret patients will start on an eight-week treatment course that's four weeks shorter than how long most patients take Gilead Sciences' drugs.
On Gilead Sciences' second-quarter earnings conference call, management was asked about Mavyret's threat.
COO Kevin Young said, "We'll just have to cross some bridges when we see their label, we see their pricing, we see how they begin to promote the product, perhaps eventually see how they come on the market with their contracting strategies. So I think there are unknowns, and we'll just have to wait and see."
Norbert Bischofberger, its chief scientific officer, dug in a bit deeper, saying, "They had excellent clinical results in genotype 1 in treatment-naive very early disease mostly F0 and F1. Actually, 80% of the population was F0 and F1 and in treatment-naïve patients. But the data in the other genotypes and also in treatment-experienced and cirrhotic patients were less good, particularly if you look at genotype 3 where they compared in eight weeks to 12 weeks to 12 weeks of sofosbuvir/daclatasvir, the regimen that had the most virological failures was the eight weeks of the AbbVie dual followed by the 12 weeks of the AbbVie dual, and the best-performing regimen was actually sofosbuvir/daclatasvir."
Clearly, Gilead Sciences wants to make the argument that its drugs offer efficacy advantages to Mavyret, particularly in specific patient populations. However, Mavyret's eight-week dosing and its price point are clearly shots across Gilead Sciences' bow.
Gilead Sciences will have to convince payers that its efficacy advantages trump Mavyret's potential cost savings. They might be able to make a compelling argument given that re-treating patients who fail on Mavyret with other therapies could get expensive quickly. If Gilead Sciences isn't successful in arguing it has an efficacy advantage, then it will once again have to compete on price, and it's hard to imagine how that wouldn't hurt its top and bottom lines.
Because of the importance of hepatitis C revenue to Gilead Sciences' financials and uncertainty surrounding how payers will view Mavyret, Gilead Sciences' and AbbVie's third-quarter earnings reports will be mandatory reading for investors looking for clues as to how this battle will shake out.