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Do Sluggish Sales of Harvoni Make Gilead Sciences a "Sell"?

By Motley Fool Staff - May 10, 2016 at 4:21PM

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Gilead Sciences' Harvoni sales are dipping as cost cutting to expand the addressable patient population kicks in.

Gilead Sciences(GILD 0.89%) recently reported first-quarter financials that show a slipping in sales for its best-in-class hepatitis C drug. Harvoni is among the planet's top-selling medications, and it's a big reason behind Gilead Sciences' surging sales. What's behind the drop in Harvoni revenue, and should investors be nervous? Find out in this clip from the healthcare edition of the Motley Fool's Industry Focus: Healthcare podcast.

A transcript follows the video.

This podcast was recorded on May 4, 2016. 

Kristine Harjes: We wanted to talk more about the hepatitis C landscape and Gilead Sciences.

Todd Campbell: Shocking, right?

Harjes: Have you heard of Gilead before, Todd?

Campbell: Yeah. Listeners know we talk about this stock a lot; let's explain for a second why.

Harjes: I think that's a good idea.

Campbell: Gilead Sciences is a massive ... it's one of the largest biotech companies, if not the largest biotech company. They do $30 billion in sales, and they market two hepatitis C drugs, that, if you combine the sales of those, make it the biggest selling on the planet and outpaces AbbVie's (ABBV 0.42%) Humira by a couple billion dollars a year in sales. We're talking about a massive story. That's why we spend a lot of time talking about it.

Harjes: Yeah, I would say it's the Apple of healthcare.

Campbell: That's a great analogy, yeah. Yeah, absolutely. Gilead Sciences reported their first-quarter earnings results, and it had a couple surprises.

Harjes: Yeah, this is the first disappointment in a while, that I can remember.

Campbell: Right. I think industry watchers were learning for earnings per share of, I want to say it was $3.14, something like that. They ended up getting $3.03, and that's not normally what happens. Usually Gilead Sciences sandbag, quote on quote, the projections so that they can underpromise and overdeliver. That didn't happen this time.

Harjes: Yeah, most of the disappointment stemmed from their hepatitis C franchise, in which product sales decreased 6% year over year, to $4.3 billion, which is still an enormous amount. That was largely driven by a decrease in Harvoni sales, which is one of the hepatitis C drugs within the United States.

Campbell: Yeah, it was all Harvoni, there's no getting around it, it was all United States. Sovaldi's sales increased and Harvoni's decreased. The reason behind that is competition, competition, competition. A couple years ago, when Gilead Sciences first launched these drugs it had a monopoly, so it priced these drugs at $84,000 for Sovaldi, $94,000 for Harvoni. But since then, you've got AbbVie launching Viekira Pak, you've got Merck (MRK 1.37%) launching Zepatier earlier this year, and as a result there's a price war.

Harjes: Yeah, actually I kind of think that that's almost a secondary force happening right here. Maybe secondary is not the right, like a preliminary force. When I was reading through this earnings call I broke it down into four major reasons why we saw this decline, and of course what management is saying. They highlight first expanded access, which triggered lower price points as per prior negotiations. They had these contracts with their payers basically saying, "If you provide the drug to more people, then we'll give it to you cheaper," which, the economics of that make sense. That's what we saw, is that there was this expanded access, and it triggered the negotiated prices to get lowered.

Second item is that they expanded their reach into lower-cost segments, like the VA. Third, shorter treatment duration, a lot more patients were taking it for eight weeks, as opposed to a longer 10- or 12-week cycle. The fourth thing is foreign exchange, which I like to ignore that, because it doesn't really mean much for the business itself, but that did affect HCV revenue by 8% year over year. I think those four things -- well, three out of four -- are somewhat driven by competition, but they're also not really as menacing and bad as competition would imply. This is a company that still has really, really strong market share, 90%-plus. They're seeing broader access to people that are not quite as sick, and therefore are seeing lower price points.

Campbell: Right, I guess that's the natural progression of the market, right? First you have massive warehousing of patients who are the sickest and then those patients get treated, and once you've worked through those patients then you could start to expand it to other people. But when you're talking about an indication that affects 3 million people here in the United States, 150 million people globally, or some estimates are higher than that, you're willing to cut the price a little bit in order to make sure that everyone who is infected can get access to this treatment. If you look at what's happened since Sovaldi's approval in 2013, I think it's roughly a million people have been treated with hepatitis C drugs, 800,000 roughly have been treated with Gilead Sciences' version of those drugs.

Obviously you want to get to a situation where you're able to treat as many of these people as possible, so that you don't see as dramatic a drop in revenue as your price is forced down. If Gilead Sciences was able to get $70,000 or $60,000 for their drug prior to Viekira Pak, then they were able to get 50 to 60 after Viekira Pak, and now they're getting 40 to 50, now that there are multiple competitors on foot. You need to offset that by treating more patients. I think that that's an important for investors to remember, is that major indication, opening it up to a larger patient pool, and that doesn't even include the potential for China. One of the things that investors should also recognize is that this drug is not available yet in China, Gilead Sciences' drug is not available in China yet, and Sovaldi could theoretically make it out to the market there as early as 2017. That could be tremendous.

Harjes: China has a market of 10 to 20 million people that have hepatitis C, that are known to have hepatitis C.

Campbell: Yeah, it's tremendous. Now who knows what the pricing will be there. Everybody's going to be lining and submitting a bid and saying, "Approve my drug, approve my drug. I'll give you the best deal." You talked about the VA. The VA has had some funding issues when it comes to paying for hepatitis C drugs that weighed down a little bit of Gilead Sciences at the end of the year. There probably was some warehousing that came through in the first quarter now that funding has become available again. Not sure whether or not, they'll probably level out throughout the rest of the year. I think investors should be looking at this and saying, "OK, yeah, there's a little bit of a hiccup because of these issues, but you're still talking about a $16 billion-per-year business for this company. You're still talking about a company that's generating out $4 billion in profit per quarter. This is far from a company that's struggling.

Harjes: This is also a company that has quite a bit of cash on the books, $21 billion at last count.

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