Source: Gilead Sciences via Google Maps.
Until last week, Gilead Sciences (GILD +2.11%) was a poster child for success in 2014. Its recently launched hepatitis C pill Sovaldi had more than $8.5 billion in sales during the first nine months of this year, and the October FDA approval of the company's second-generation hepatitis C drug Harvoni had investors expecting Gilead's sales to similarly impress in 2015.
However, those sky-high projections were deflated when drug middleman Express Scripts (NASDAQ: ESRX) said AbbVie's (NYSE: ABBV) new hepatitis C drug, Viekira Pak, would be the exclusive treatment for genotype 1 patients covered by its drug formulary, a ranking system used by healthcare payers to decide which drugs they will cover. That decision caused Gilead Sciences shares to tumble by nearly 20% in two days last week, in the process creating an intriguing opportunity for investors.
The backstory
More than 150 million people around the world are infected with hepatitis C, and the launch of Sovaldi last December was truly game changing for those patients.
Previously, hepatitis C patients were prescribed a combination of drugs that included Vertex Pharmaceuticals' (VRTX +0.78%) Incivek and the side effect-laden cocktail of peginterferon and ribavirin. That treatment regimen was far from ideal, because it relied on painful injections, came with flu-like symptoms, and only cured about 80% of patients taking it. As a result, doctors and patients were quick to embrace Sovaldi, which was taken as a pill, eliminated peginterferon for most patients, and cured more than 90% of patients. However, those advantages came at a steep expense: Sovaldi costs $84,000, or about $1,000 per pill, which is far north of the $50,000 or so that payers forked over for Incivek.
Source: Gilead Sciences.
A similar situation has played out with Gilead's newly approved Harvoni. The drug, a one-pill combination of Sovaldi and ledipasvir, offers cure rates as high as 99%, removes the need for both peginterferon and ribavirin, and can offer 40% of genotype 1 patients an eight-week treatment cycle, rather than the 12 weeks required for Sovaldi patients. Those advantages made doctors and patients instant fans, but Gilead Sciences' decision to price its 12-week cycle at $94,500 drew payers' ire.
As a result, payers have rooted for another successful treatment option they could pit against Harvoni. AbbVie's Viekira Pak, which won FDA approval last week, gave them that, as well as a drugmaker eager to offer steep price discounts to grab market share. AbbVie cut a deal with Express Scripts that makes Viekira Pak the exclusive hepatitis C treatment on the pharmacy benefits manager's formulary -- essentially shutting out Harvoni for the 25 million patients covered by plans that rely on that formulary.
Opportunity ahead?
There's little question the move will mean more sales of Viekira Pak than initially anticipated, but before investors shun Gilead Sciences, they should remember the roughly 3 million people with hepatitis C in the United States and 9 million people with the disease in Europe.
While Express Scripts is a big player in pharmacy management, its decision only impacts about 175,000 hepatitis C patients, roughly 70% of the 1% of Americans with hepatitis C who are covered by the formulary.
That suggests Harvoni could still be used to treat tens of thousands of patients in 2015, especially given that Gilead's product is arguably the better drug. Harvoni is taken once daily, while Viekira Pak's regimen consists of three pills in the morning and another pill in the evening. Harvoni also delivers better cure rates without ribavirin than Viekira Pak, and Harvoni can be dosed for as little as eight weeks, while Viekira Pak requires 12 weeks of treatment.
Gilead Sciences should also still generate plenty of sales for Sovaldi. The American Association for the Study of Liver Diseases only recommends Harvoni and Viekira Pak in genotype 1 and genotype 4 patients, which means that as many as 30% of hepatitis C patients globally will still need to take Sovaldi. It's also important to recognize that Express Scripts didn't remove Sovaldi from its formulary for patients other than genotype 1.
In addition to Gilead Sciences' remaining opportunity in hepatitis C next year, the company should also continue reaping blockbuster sales for its HIV drugs. GIlead Sciences is the top seller of HIV medicine globally and boasts five HIV therapies that may deliver $1 billion or more in sales this year. The company is on pace to generate $10 billion or more in sales from its HIV therapies in 2015.
Gilead Sciences also markets two cardiovascular drugs that produce another $1 billion in annual sales, and the company just launched its first cancer drug, Zydelig, this past summer. These multiple levers for sales growth suggest there is plenty of revenue outside of hepatitis C to support owning shares in the company.
A brighter future?
While Express Scripts' decision could dent sales in the short term, it doesn't derail Gilead Sciences' future. The company is working on yet another generation of hepatitis C treatments that could bring higher cure rates to even the toughest-to-treat cases and may further cut down the treatment period. Competitors are working on their own new treatments, but Gilead Sciences arguably remains in the lead.
Additionally, Gilead's pipeline is flush with other therapies that could move the needle, including treatments for hepatitis B and various cancers. The company offers a rock-solid balance sheet with more than $6.2 billion in cash on the books, and following this week's drop its shares are now trading at nine times next year's earnings estimates, so investors willing to take the long view here could be rewarded with profits down the road.
