The FDA approval in December of AbbVie's (NYSE:ABBV) hepatitis C therapy Viekira Pak and the ensuing price cuts by AbbVie Inc and market leader Gilead Sciences (NASDAQ:GILD) to win market share are weighing down Gilead Sciences' share price. Although both companies have indicated that they've chopped prices to sure up customers, investors may want to start thinking about lower prices as a good thing, rather than a bad thing.
Tapping into a huge market
When Gilead Sciences launched its oral hepatitis C drug Sovaldi in December 2013, it revolutionized hepatitis C treatment.
Previously, hepatitis C patients were treated with side-effect laden cocktails that included peg interferon and ribavirin, lasted as long as 48 weeks, and offered cure rates that were less than ideal at between 50%-80%.
Sovaldi's once-daily, 12-week dosing didn't eliminate ribavirin altogether, but it did cast aside peg interferon for most patients, while delivering cure rates north of 90%. As a result, doctors eagerly embraced Sovaldi, turning it into the fastest drug to ever achieve billion dollar blockbuster status as it made its way to delivering a truly astounding $10.3 billion in full year sales last year.
Sovaldi's sales performance is truly remarkable in its own right, but Gilead Sciences strengthened its hepatitis C leadership in October when the company won the FDA go-ahead for its next-generation hepatitis C drug Harvoni.
Harvoni, which is a Sovaldi plus ledipasvir mash-up, is used to treat hepatitis C genotype 1 patients. Importantly, the drug removes the need for both peg interferon and ribavirin while offering cure rates in the high 90% range. Due to its easier dosing regimen and rock-solid efficacy, Harvoni notched more than $2 billion in sales during its first quarter on the market.
As a result, GIlead Sciences' Sovaldi plus Harvoni sales totaled an eye-popping $12.4 billion last year -- and that's with Harvoni having only a single quarter on the market. That's quite an achievement, but I believe that, despite this year's price cuts, the long term opportunity for sales of these drugs could be significantly higher.
During Gilead Sciences' fourth quarter conference call, management indicated that its gross to net price discount on its hepatitis C drugs will grow from 22% last year to to 46% this year.
From the conference call, "This increase is a result of the recent and ongoing round of negotiations with payers and PBMs and includes the shift toward a higher proportion of public payers and higher prescribing of Harvoni among those payers with rebates to payers such as the Medicaids and the VA exceeding 50%."
On the surface, that admission of price cuts sounds horrible to investors. After all, why would shareholders be anything other than upset about discounting that could imperil Gilead Sciences' margins?
To answer that question, investors need to consider the big picture.
It's estimated that there are roughly 3 million people with hepatitis C in the United States. There's another 9 million Europeans that are diagnosed with the disease, and there's more than 1 million Japanese with hepatitis C. That means that the total addressable patient population for hepatitis C drugs is roughly 13 million people in developed markets -- where pricing power is best.
How many of these 13 million people were treated by Gilead Sciences drugs last year? Just 140,000 in the U.S. and a little more than 30,000 in Europe.
That's not a lot of people given the size of the market.
The reason that so few people were treated last year is because of Sovaldi and Harvoni's sky-high prices. Sovaldi, which clocks in at $84,000, and Harvoni, which has a price tag of $94,500, were so expensive that healthcare payers sought out every opportunity to limit their use.
In order to negotiate Sovaldi and Harvoni prices lower, healthcare payers ended up making concessions that include exclusivity and agreements that make these drugs much more widely available. As a result, there should be far less rationing of these hepatitis C drugs in 2015, a point that was also highlighted by Gilead Sciences' Executive Vice President Paul Carter when he said that "high levels of rebates are tied directly to opening up access and streamlining the process of starting a patient on therapy."
Hepatitis C is an important disease that affects many people and the more quickly we can get revolutionary medicine to patients, the better it will be for everyone. While I don't have a projection for how many patients will ultimately be treated with Sovaldi, or Harvoni this year, I am quite confident that the number will total far more people than were treated in 2014.
For its part, Gilead Sciences estimates that it could treat as many as 250,000 patients this year. If that's true, then I think that Gilead Sciences hepatitis C drugs will have a much bigger and longer-lasting impact on the company's profitability than if they had remained more exclusively rationed. For that reason, I think that this pricing "bad news" may indeed end up being very good news.