One of the sparks that ignited the recent biotech sell-off was the backlash over the cost of Gilead Sciences' (GILD 0.55%) highly effective hepatitis C therapy. While much of the industry needed a reality check, it looks like the market has overreacted to threats against the company's pricing power.
Gilead's price-to-earnings ratio based on full year estimates hasn't rested at this level since 2012. Let's take a look at what's happened over the past week and see if the pessimism is well deserved, or not.
The good
Some sales estimates suggest Sovaldi could become the best selling drug in history. While I'm less optimistic, getting ahead of the competition is still paramount. Gilead's combination of Sovaldi and ledipasvir received a Breakthrough Therapy designation, and priority review status from the FDA for treatment of hepatitis C virus, or HCV, genotype 1 infection. The agency is expected to announce its decision by October 10.
Also working in Gilead's favor are results from a phase 2 study of the same combination. All 26 previously untreated HCV genotype 3 patients given Gilead's combination plus ribavirin showed a sustained virological response 12 weeks after they finished treatment, a metric abbreviated to SVR12. Sovaldi also succeeded in difficult to treat patients that had failed more than one treatment. 74% of the 50 patients with 12-week data achieved SVR12.
Since its launch at the end of last year Sovaldi sales have taken off like a rocket. Analysts expected an initial pop due to doctors "warehousing" patients prior to the launch, but new prescription figures continue to impress. Figures from the first 16 weeks of the launch suggest a potential 2014 U.S. sales run rate of $8 billion.
The bad
Unfortunately for Gilead investors, Sovaldi isn't the only HCV treatment with eye-popping clinical data. The latest successes from AbbVie (ABBV 1.03%) also include a set of patients that either failed to respond to, partially responded to, or relapsed after previous treatments. Combined, 96% of the pre-treated patients achieved SVR12.
Bristol-Myers Squibb's (BMY 1.72%) HCV combination is designated by the FDA as a Breakthrough Therapy for treatment of patients with HCV genotype 1b. Last Monday, the company announced the submission of a new drug application for its designated indication.
Bristol-Myers filed a second application for the use of the daclatasvir half of the combo in combination with "other agents" for multiple HCV genotypes. Investigators are currently investigating combinations of daclatasvir and Sovaldi in some highly specific, unmet patient populations.
Merck (MRK 0.12%) also has an oral, two-drug combination HCV treatment producing positive clinical data. Every patient in a group of 32 achieved a sustained viral response after four to eight weeks, following 18 weeks of treatment with Merck's combination and ribavirin. Merck's interim results with differing treatment periods and earlier viral response measurements make comparisons very difficult. The important takeaway is that Merck's combo looks effective enough to be considered a potential threat.
The ugly
Express Scripts (ESRX +0.00%) Chief Medical Officer, Steven Miller, voiced concerns to Bloomberg about Sovaldi pricing, again. Worried about the skyrocketing burden of specialty medicines, Miller claimed Gilead will "break the country" with Sovaldi. When discussing the potential competitive landscape for HCV therapies Miller claimed, "We could shift the market share as soon as a competitor comes out."
Texas joined a list of states considering strict limits on Sovaldi availability for Medicaid patients. California, Colorado, and Virginia are also considering similar policies. The Texas Health and Human Services Commission's proposed policy is one of the harshest yet. It would limit access to sicker patients whose HCV had developed into advanced liver disease.
Final thoughts
I didn't highlight all the bad and ugly things that happened to Gilead last week because I think it's a bad stock to own. I did it because it's important to understand the fears driving down its price.
Otherwise, this great company is in the middle of one of the most successful drug launches in history. It finished last week with a forward price-to-sales ratio it hasn't seen since last March. Even if the bad, and ugly, factors play out as feared, Gilead still may make for a solid investment at $66.
