Source: Gilead Sciences
Gilead Sciences (GILD 0.77%) has been the poster child for biotechnology success this year thanks to Sovaldi, its game-changing therapy for hepatitis C. However, there's a potential hiccup that could soon weigh on Gilead's shares.
Over the coming days and weeks, insurance companies will report earnings, and within those earnings reports, these companies may show that their bottom lines were bumped up by doctors choosing to warehouse, rather than treat, patients with Gilead's Sovaldi.
Slowing scripts
There's no doubt that doctors believe Sovaldi is a revolutionary drug. They prescribed it in droves during the first six months of this year. But in the third quarter, doctors took a more cautious approach to using Sovaldi. According to data compiled from Bloomberg Intelligence, prescriptions written for Sovaldi slid last quarter ahead of the FDA's decision on Gilead's second-generation hepatitis C drug, Harvoni.
Source: Bloomberg Intelligence Data.
If Sovaldi's sluggish scripts boost insurer profit and result in lower-than-hoped sales for Gilead, investors probably shouldn't be too surprised. Doctors have previously shown a willingness to delay hepatitis C treatment for all but the sickest patients ahead of more new drug launches.
For instance, Vertex Pharmaceuticals' Incivek became the fastest drug launch to ever achieve $1 billion in sales in part because doctors shelved treatment with side-effect-laden peg interferon and ribavirin for months prior to its launch. Incivek faced a similar benching ahead of Sovaldi's launch, contributing to Sovaldi generating sales of more than $2.2 billion in its first quarter on the market. And now Gilead appears to have cannibalized its own sales with Harvoni, a drug considered to be as game-changing to Sovaldi as Sovaldi was to Incivek.
Why doctors pressed pause
Last week, the FDA gave Gilead the go-ahead to start marketing Harvoni, so the weight of falling script volume is likely to be a one-time event.
However, until Gilead reports its own third-quarter results later this month, investors will remain in the dark over just how much Sovaldi crimped the company's profit this past summer, and that could mean Gilead's shares become much more volatile over the coming weeks. Since that volatility could mean a steeper decline in the company's share price, let's look more closely at why doctors would rather prescribe Harvoni than Sovaldi.
First, Harvoni reduces treatment duration for many previously untreated patients without liver disease from the current 12 weeks for Sovaldi to as little as 8 weeks. That shorter treatment period is important to reducing side effects and improving patient adherence rates.
Second, Harvoni does away with side-effect-laden peg interferon and ribavirin, two troublesome drugs that doctors have been eager to cast aside. While Sovaldi eliminated peg interferon in many cases, it didn't eliminate ribavirin.
Thirdly, Harvoni marks a significant improvement in functional cure rates over Sovaldi. During phase 3 trials, up to 99% of patients treated with Harvoni were disease free after 12 weeks, compared to up to 90% of patients for Sovaldi.
Thinking ahead
Long-term thinking has been shown to be a better strategy than short-term trading time and time again, so investors may be wise to look beyond any potential third-quarter revenue shortfall and consider the long-term opportunity instead.
Globally, more than 120 million people are diagnosed with hepatitis C, and in Europe and the U.S., there are roughly 18 million patients with hepatitis C that may require treatment. Of those patients, just 70,000 were treated with Sovaldi during the first six months of this year, yet those patients resulted in billions of dollars in sales.
Since any short term warehousing will likely result in pent-up demand for Harvoni and the global patient pool for treatment is big, Harvoni should see sales accelerate quickly. While Harvoni is likely to be the big catalyst for Gilead revenue in 2015, Sovaldi should still generate sales, too. That's because Gilead inked a deal in September that allows generic manufacturers to begin producing and marketing generic Sovaldi in developing nations next year. Overall, that suggests that investors may benefit from ignoring sluggish Sovaldi demand last quarter and focusing instead on sales growth in 2015.
