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Mar. 17, 2014 9:34 AM ET | 16 comments | About: GILD by: Peter Geschek
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.
Summary
- Sovaldi, Gilead’s oral Hepatitis C drug, by all accounts is having a fantastic launch.
- The usual bickering about its high cost is louder than usual because of the large number of patients.
- It’s time to consider the cost of not using this wonder drug.
Launch
Gilead Sciences' (GILD) Sovaldi is now projected to become the best-selling medicine of all time by several analysts.
Sovaldi is the first in a new wave of Hep C treatments that promise better cure rates and a shorter treatment course. Some even forecast it would reach $9 billion or more in sales by 2017, at which level it would surpass Pfizer's (PFE) Lipitor and take the crown as the biggest-selling drug of all time.
Analysts are trying to outdo each other with optimistic forecasts. According to ISI Group analyst Mark Schoenebaum, if prescriptions were to never grow again, that is assuming a flat line from here on, sales could be projected at $8 billion for 2014.
RBC analyst Michael Yee notes, Sovaldi's weekly total prescriptions are tracking 114 percent higher in its first full-quarter of launch than what Incivek, Vertex's (VRTX) Hep C drug did. Incivek holds the title for fastest drug launch ever, after raking in $1.56 billion in the first four quarters.
Wells Fargo analyst Brian Abrahams maintains an Outperform rating on Gilead, following IMS prescription data for Sovaldi for the week ending Feb. 28. The week's total prescriptions for Sovaldi were 6,398, up 20.9 percent vs. the previous week's 5,291. In one scenario, he forecasts sales by the end of 2014 at $10.80 billion.
Citigroup's analyst Yaron Werber believes that since Sovaldi is tracking at $943 million for the first twelve weeks of launch, it could post $8.76 billion in sales for 2014.
Pricing
There is a louder than usual bickering about the price of the drug. The reason for that probably is that the potential patient base is a lot larger than for most of the expensive drugs, and also that the company Gilead represents a favorite target for activists.
The California Technology Assessment Forum members gave a "low value" rating to Sovaldi, not because of any efficacy issues but because of its cost. The vote was non-binding, and the panel claimed that not all Hep C patients require the most expensive drugs. They said that if California treated every patient with liver damage, it would cost the state over $6 billion.
In January, the AIDS Healthcare Foundation urged state Medicaid providers to deny coverage for the drug until Gilead agrees to lower the price. The group, which provides HIV testing and prevention services, argued that Sovaldi's price "will unnecessarily drive up health care costs and limit access to potentially lifesaving care", and it noted that Sovaldi costs 1,100 percent more than Gilead's most expensive HIV drug, Stribild, which costs $80 per pill.
Express Scripts (ESRX), the giant pharmacy benefit manager, has made a statement earlier this year that it may eliminate certain new drugs from its formulary because of their high cost. The company later denied that it meant Sovaldi. For the time being, it could have a problem denying Sovaldi, since it is the only new Hep C antiviral to show effectiveness in genotypes 2 and 3, and those patients represent about 20 percent of all Hep C patients in the U.S.
Gilead itself has said that payers should be comfortable with the price of the drug, especially when considering the long-term benefits. For example, a new liver, when it is available at all, costs about $300,000 in the U.S., not counting additional expenses.
Economics
Sovaldi's treatment regimen costs $84,000 at wholesale, but the newly approved Olysio from Johnson & Johnson (JNJ) isn't much cheaper at $66,000 for one course of treatment. And the new treatments are a lot more effective than the similarly priced Incivek and Victrelis that they are replacing.
Sovaldi's benefit is not a few months of extra survival like some of the newer cancer drugs, but for most patients, it represents a cure.
Also, $84 thousand seems like a bargain when the cost of medical management of end-stage liver disease and/or liver transplantation is considered.
In 2011, a study was made about the economic cost of advanced liver disease by the Henry Ford Foundation, financed by Genentech, now a subsidiary of Roche (OTCQX:RHHBY).
The study compared the economic burden for U.S. patients based on data from a large private health insurance claims database from 2003 to 2010. The database included claims for all prescription medications and all medical services submitted for payment.
Researchers looked at 53,796 patients with chronic hepatitis C. Out of that total, 41,858 (78%) were without cirrhosis, 3,718 (7%) with compensated cirrhosis, and 8,220 (15%) with end-stage liver disease. Mean age was 49 years, 51 years, and 52 years respectively.
The study estimated the annual healthcare costs to be $24,176 for patients with chronic hepatitis C infection.
When looked at by disease stage, average annual costs were estimated to be $17,277 among patients with no cirrhosis, $22,752 among patients with compensated cirrhosis, and $59,995 annually among patients with end-stage liver disease.
The main cause of higher healthcare expenses were the inpatient costs for patients with end-stage liver disease and pharmacy costs for patients with compensated cirrhosis.
The key, therefore, is to treat and cure the infection early to prevent the consequences of more advanced disease and the associated economic burden.
These numbers are three years old, and so the cost should be adjusted for medical inflation. Remember also that these are annual figures that will occur year after year for the rest of the person's life. They never go away, but can rise when the disease enters into a more serious phase. The cure, of course, does not eliminate the costs entirely, but drastically reduces them as far as hepatitis is concerned.
The bottom line in the price dispute is that it is not realistic to single out a company or a single drug. If you want price reduction, it has to be industry-wide, including hospital costs, the cost of the process of getting a new drug approved, the price of the competing products. Otherwise, you may kill the exact product and its maker that works best for the patients.
As to Gilead, in its many years in the HIV drug business, it has been constantly attacked for high prices and rarely, if ever, budged.
Huge market
Hepatitis kills more people than HIV in most countries.
HIV/AIDS is the world's best-known virus, the subject of marches, concerts, publicity and billions of dollars of aid, and with good reason: it killed 1.47 million people in 2010.
Viral hepatitis is not as famous, but it killed 1.44 million worldwide, almost as many as HIV.
And viral hepatitis killed more people in 117 of the 187 countries tracked by the Institute of Health Metrics and Evaluation at the University of Washington, including in India, China, Britain and Japan.
Five different viruses can cause an inflammation of the liver, and accordingly, there are five types of hepatitis: Hepatitis A, B, C, D and E.
Types A and E are transmitted through contaminated water and food. Types B, C and D are delivered through infected blood, like dirty syringes, or in the case of B, through intercourse or the mother giving it to her child during birth.
Hepatitis B and C, in particular, can be the cause of liver cirrhosis and cancer.
The CDC estimates that in the U.S., about 3.2 million persons are chronically infected with HCV. Approximately 75-85 percent of people infected with the HCV virus will develop chronic infection.
Successful treatment is measured by an SVR (sustained virologic response), which signifies an undetectable viral load after the designated period of treatment. Any drug that gets rid of the hepatitis C virus, and there's no virus six months after therapy, is considered a cure.
Gilead said at an earnings conference earlier this year that at this point, only about 20 percent of the specialist physicians have prescribed Sovaldi, indicating that the launch still has some way to go to penetrate the market.
In an effort to spread the word faster, the company started direct-to-consumers television advertising, which aims to increase awareness of the drug and helps maintain strong patient in-flow throughout the year.
Competition
Behind Gilead, AbbVie's drugs are the nearest to FDA approval.
Barclays analyst Ying Huang believes that Gilead has an advantage over AbbVie: the convenience of fewer pills and the shorter therapy duration for untreated patients. These two advantages are underappreciated, but they both are critical when it comes to patient compliance.
Also, in Phase III trials, Gilead's regimen was associated with fewer relapses than AbbVie's.
Gilead's fixed dose combination does not contain ritonavir, which is known for drug-on-drug interactions and shows comparable efficacy with or without ribavirin. AbbVie's regimen requires ritonavir, and in some cases, ribavirin.
Investors' view
Gilead's earnings-per-share increase in 2013 was 4.6 percent from 2012, but it is projected to rise 84 percent from 2013 for 2014 and 51 percent for the following year.
Earnings estimate for 2014 is $3.76 per share (an increase from the reported $2.04 for 2013) based on Bloomberg's averaging of 28 analysts' forecasts, and $5.70 for 2015 based on 27 analysts' opinion.
Analysts at Cowen believe that even these numbers are too low considering that the uptake of Sovaldi has been faster than expected. Further acceleration of sales is expected after the combination of Sovaldi and ledipasvir is approved, and in 2015, treatment volumes could be two to three times more than this year.
Cowen has a $95 price target for the stock. The Deutsche Bank price target is $132, and the consensus estimate among analysts for the 1-year price target is $100.17.
By all accounts, unless something drastically negative happens, Gilead's share price is destined to go up.
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