December 13, 2013

Don't Short Gilead Sciences Just Yet

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Dec 13 2013, 11:08  | 9 comments

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

"We will identify which drugs can be pitted against each other and will make some really tough formulary decisions." Steven Miller

Late Friday, the FDA approved Gilead Sciences' (GILD) Sovaldi for hepatitis C. After a very brief rise on the much anticipated news, Gilead's stock went into decline mode.

News that John Martin and Gregg Alton, Gilead's CEO and Executive VP, respectively, have been selling shares in the company, coupled with an announcement by Steven Miller, Chief Medical Officer of Express Scripts (ESRX), the largest U.S. prescription benefits manager (PBM), that his company is planning to preempt a price war between Sovaldi and, the yet to be approved,AbbVie's (ABBV) new hepatitis medication, sent Gilead's stock lower.

Sovaldi's price of $1,000 per daily pill, or $84,000 per treatment cycle has been the subject of contention among activits and PBMs alike. The activists outrage is really not justified, since the patient will co-pay only $5. However, The Express Scripts' Chief Medical Officer's statement deserves a deeper examination.

Gilead paid $11 billion to acquire Sovaldi, together with Pharmasset, its developer, two years ago. The company spent another $2 billion to bring the drug to market, without any assurance of success. Gilead is not a charity but a for-profit-business and deserves to make a return on its investment and to reward its shareholders for co-sharing the risk.

Chronic hepatitis C, which affects an estimated 3.2 million Americans, causes liver cancer which leads to the need for very costly liver transplantation and eventually death.

Sovaldi, at $84,000 per treatment cycle, is priced much less than many of the other new cancer drugs that came to market recently. We believe that the statements coming out of Steven Miller, a medical professional and a high level executive at one of the country's largest prescription management companies, are misguided.

When Dr. Miller says, "If the difference in convenience cannot be demonstrated to have a difference in outcomes, we often recommend coverage of the equally effective, less-convenient product," he is actually stepping his bounds as medical insurance person and inserting himself between "the patient" and his or her "physician".

Physician-Patient relationships are bound by the Hippocratic oath not by exuberantly salaried bureaucrats working at extremely profitable insurance companies that have gotten fat on patients' premiums in the first place.

But let us suppose that Dr. Miller is justified in trying to rob the insurance paying patients out of the convenience of receiving the life-saving drug that their physician thinks that they need, would he be able to do it?

Sovaldi's Potential Competitors

Several companies are developing hepatitis C treatment regimens that do not require injectable interferon, which causes miserable flu like symptoms that lead many patients to discontinue or delay treatment.

AbbVie, Bristol-Myers Squibb (BMY) and Merck (MRK) are all seen as potential rivals with oral regimens that have shown impressive cure rates and also cut the current treatment duration to 12 weeks or less from the current 48-week treatment regimens.

AbbVie, which is developing a three-drug treatment regimen of ABT-333, ABT-450 and ABT-267 direct acting antivirals that each attack a different viral target necessary for the virus replication, has just releasedthat its therapy regimen has cured 96% of difficult-to-treat patients after 12 weeks in a late-stage clinical trial.

However, the regimen currently involves four pills a day plus typically 2 ribavirin pills a day. Despite receiving FDA fast tract designation, the cocktail is not likely to be approved before 2015.

BMS, which is developing a two-drug regimen of daclatasvir and asunaprevir in late phase 3, is even further behind AbbVie in its drug development efforts. The company's first presentation of its phase 3 interim findings was presented last month in Japan, which is likely to be the first market the cocktail is approved in.

Merck currently markets Victrelis for hepatitis C. However, the drug's sales has been declining recently because many doctors have advised their patients to wait for the more superior Sovaldi to be approved.

Merck, after realizing Victrelis disadvantage, is playing catch up with a combination of MK-5172, an NS3/4A protease inhibitor, and the NS5A treatment MK-8742. Cure rates have been good, ranging from 96% to 100% in genotype 1a and 1b patients. However, the number of patients tested was small with a total of 58 evaluable patients included in the readout.

First Mover Advantage

Gilead is first to market with Sovaldi which is expected to achieve steep sales revenue from its moment of launch due to the fact that many doctors advised their patients to wait for this new revolutionary therapy rather than start on one of the old, sometimes ineffective, treatment regimens.

According to the average of six analysts' estimates compiled by Bloomberg, Sovaldi could generate $9.5 billion in annual sales before the end of 2017. To put that in perspective, during 2012 Gilead generated a total of $9.7 billion.

Even if any of the potential competitors enters the market before 2017, I think they would be foolish to play into the hands of PBMs' fat cat bureaucrats and enter into a price war that could jeopardize the future of pharmaceutical research, development and innovation for years to come.

As for John Martin and Gregg Alton recent insider sales, though unfortunate, they were part of a 10b5-1 scheduled insider sale plan, rather than a deliberate selling on the good news and the peaking of the shares.


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