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Shares of Gilead Sciences (GILD -0.72%) fell by more than 14% today on word that competitor AbbVie notched FDA approval of a competing hepatitis C treatment Friday and that drug middleman Express Scripts inked a deal with AbbVie that puts AbbVie's therapy in its preferred formulary.
Why it's happening
Gilead Sciences has notched more than $8.5 billion in sales from its hepatitis C drugs through the first nine months of 2014. Following the October launch of Harvoni, the company's next generation hepatitis C drug, analysts have broadly expected that Gilead Sciences' sales next year would head north of that figure. News that AbbVie's multidrug cocktail, which will be sold under the name Viekira Pak, won approval isn't a surprise, but AbbVie's deal with Express Scripts caught investors off guard.
Express Scripts' formulary is relied on by plans covering 25 million people, and the inclusion of Viekira Pak and the corresponding exclusion of Harvoni (and in some cases Sovaldi) suggests that AbbVie may dent Gilead Sciences sales more than previously expected. An even bigger threat is other health care payers potentially following Express Scripts' lead. However, that remains to be seen, given that Express Scripts plans represent just a portion of the roughly 3 million people diagnosed with hepatitis C nationally.
What may happen next
More than 150 million people are infected with hepatitis C globally. The size of the global patient pool means that there's a tremendous opportunity for these companies to generate revenue; the question, however, is how much revenue. If payer pushback forces additional concessions, it could weigh on Gilead Sciences' sales, but it's unlikely to derail the company. Treating hepatitis C is likely to remain a multibillion dollar market, and beyond that, Gilead Sciences has a slate of other top selling medications, including HIV therapies that produce $10 billion in annual sales. All things considered, investors may want to maintain their long-term focus.