What: Shares of biotech giant Gilead Sciences (NASDAQ:GILD) went for a wild ride in December, losing as much as 14% of their value (based on where it began the month) in just a matter of two days, based on data from S&P Capital IQ, after its rival AbbVie (NYSE:ABBV) made a long-term agreement with Express Scripts (NASDAQ:ESRX).
So what: Gilead Sciences' claim to fame in 2014 was the approval of Sovaldi and Harvoni (a cocktail drug comprised of Sovaldi and ledipasvir) to treat hepatitis C. These drugs are a major step forward in terms of patient quality of care in that Harvoni can be administered to HCV genotype 1 patients without the need for interferon or a ribavirin, and Sovaldi can be administered without interferon. Both interferon and ribavirin have been known to cause unpleasant side effects in patients, so their absence is welcome.
In addition to improved quality of care, Harvoni and Sovaldi elevated the sustained virologic response in most studies to 90% or better. In other words, it was a practical cure to HCV. But, that cure comes with a price of $1,000 per Sovaldi pill and $1,125 per Harvoni pill, or $84,000 and $94,500 per standard 12-week treatment.
However, in mid December, AbbVie had its combo drug, Viekira Pak, approved by the Food and Drug Administration. The most interesting news following this approval was the multi-year agreement made just days later between AbbVie and Express Scripts that announced Express Scripts will exclusively use Viekira Pak as the HCV-1 preferred treatment option. In exchange, Express Scripts gets AbbVie's drug at a "significant discount." In short, this is the first high-profile incidence we've witnessed on a high-priced drug being kicked off a pharmacy-benefit manager's list in favor of a cheaper drug.
Now what: As you can tell by Gilead investors' reaction in December, its shareholders are clearly worried about AbbVie and other potential competitors eating into Gilead's revenue stream. However, I'm not as concerned.
I actually suspect that AbbVie and Express Scripts' pact could backfire with patients potentially perceiving the deal as excluding them from a superior drug. For one thing, Viekira Pak can be used with or without ribavirin. Ribavirin has been known to causes rashes and other unpleasant side effects in HCV patients, whereas Harvoni and Sovaldi have very minimal side effects. People normally aren't a fan of having their choice taken away from them when it comes to corporations saving a buck, so this may not wind up going over too well.
Also, we have to take into consideration that the HCV market is enormous. The World Health Organization estimates that there are 180 million people around the globe with HCV, meaning a market for multiple drug developers does exist. Sovaldi, for example, was only given to 117,000 people through the first nine months of 2014, so there will be ample opportunity for a handful of drug developers to prosper.
At less than 10 times forward earnings, I personally consider Gilead to be an exceptional bargain here.