Gilead Sciences (NASDAQ:GILD) reported its Q1 2016 earnings on April 29, and on the surface things looked pretty ugly for the hepatitis C treatment leader. Gilead missed analyst estimates on both revenue and earnings, and HCV revenue per patient declined substantially as the company provided more, and deeper, discounts to payers.
Why lower revenue per patient is a good thing (or at least necessary)
Gilead Executive VP Paul Carter explained on the earnings call that sales fell in part because "several of the large commercial payers opened up access to patients regardless of their fibrosis scores during quarter 1. The consequence of that was that they triggered a discount that had been previously negotiated in order to incentivize that opening up of restrictions." (Quotes from S&P Global Market Intelligence.)
So Gilead's making less money right now per patient -- but in exchange, it's opening up more (less sick) patients to its HCV blockbusters Sovaldi and Harvoni.
This could be a big deal for Gilead. One of the big risks for the company's future growth in hepatitis C has been the steep prices for Sovaldi and Harvoni. In the U.S., Sovaldi's list price is $84,000 for a course of treatment, while Harvoni's is $93,500. That's not cheap, and payers have tried to control costs by restricting the potential beneficiaries of these therapies to those with more advanced HCV infections -- a smaller pool of patients with higher fibrosis scores.
If you dig in, you can already see the positive trends beginning. U.S. new patient starts on Gilead HCV treatments increased by 10% sequentially to 55,000 in Q1 of 2016, reflecting the beginning of what could be a substantial expansion in the treatment ramp-up. The mix of patients intending to begin treatment on a Gilead drug also shifted toward those lower fibrosis scores (i.e. healthier), with 56% in F0-F2 and only 44% having F3-F4 scores. Compare that score mix to Q4 2015 (50% F0-F2, 50% F3-F4) and Q3 2015 (51% F0-F2, 49% F3-F4).
There were other contributing factors, too
Gilead's payer mix shifted toward government payers in the U.S., such as Medicaid and the VA, which get extra discounts and so drag revenue per patient down further. But those discounts are helping Gilead expand into additional patient pools, vacuuming up volume while competitors Merck (NYSE:MRK) and AbbVie (NYSE:ABBV) continue to play catch-up.
Gilead's patient mix is also shifting toward shorter treatment durations, with around 43% of the intent-to-treat population shifting to eight-week treatment instead of 12 or 24 weeks. Eight weeks of treatment means Gilead brings in less revenue per patient (it charges by the pill), but it could be good news for the company as it faces increased European competition. Carter noted on the call that in Europe "some payers ... are treating the products a bit more like commodities" instead of crediting Gilead for a differentiated profile. Well, AbbVie's HCV cocktail Viekira Pak generally has to be taken for 12 to 24 weeks, and Merck's Zepatier is a 12- to 16-week drug. So Gilead may be able to differentiate itself in Europe by pointing to the eight-week duration, which should both save payers money and improve patient treatment compliance. Seems like a potential win-win.
Lower prices were inevitable
With three players fighting for market share, Gilead has to discount its drugs. Management made the right call to do so now rather than lose market share. And given that Gilead's market share remains greater than 90% in the United States, this is a smart move to maintain the company's dominance and expand the patient pool it can treat. And with non-GAAP operating margin at 69%, Gilead has the room to make it up on volume.