Has Gilead Priced Sovaldi Too High?

Aug. 5.14 | About: Gilead Sciences, (GILD)


Sovaldi, Gilead’s treatment for hepatitis C, was approved in December 2013.

The drug has been a hit, with sales of almost $3.50 billion in the second quarter.

High cost of Sovaldi treatment has sparked a controversy.

Gilead is justified in maintaining a high price for some valid reasons.

In December 2013, the U.S. Food and Drug Administration (FDA) approved Gilead Sciences Inc.'s (NASDAQ:GILD) Sovaldi™ for the treatment of chronic hepatitis C. In a short period of time, Sovaldi has become a treatment of choice for hepatitis. Indeed, the drug had sales of nearly $3.5 billion in the second quarter of 2014. It has propelled Gilead Sciences into the big league. At the same time, though, the high cost of Sovaldi has also sparked a controversy. However, Gilead is justified in keeping a high price for the drug.

Sovaldi's Success

Sovaldi was approved by the FDA for the treatment of chronic hepatitis C in December last year. Sovaldi is already a blockbuster drug. In the second quarter of 2014, Sovaldi multi-billion sales beat consensus forecast. Analysts expect Sovaldi sales to cross $10 billion this year. That certainly looks very likely, given the sales in the first two quarters of 2014.

Sovaldi has in fact become the treatment of choice for hepatitis C in the U.S. According to IMS Health, within a few months of its launch, Sovaldi prescriptions are higher than those for all other hepatitis C pills combined. IMS Health data shows that in May this year, over 48,000 prescriptions were filled for four hepatitis C pills, including Sovaldi. The data shows that Sovaldi accounted for 75% of the total prescriptions filled.

The IMS Health data further shows that in the first 30 weeks since the launch, 62,000 new patients tried Sovaldi. This is about three times as many patients for an earlier treatment that had shown potential. The significant uptake of Sovaldi is not surprising, given that studies show that the treatment has a 90% success rate.

The success of Sovaldi has also pushed Gilead into the big league. Following the strong second-quarter results, Gilead raised its 2014 revenue guidance to include the impact of Sovaldi sales. The company now expects net product sales for 2014 to be between $21 billion and $23 billion, compared to its previous forecast of net product sales of between $11.3 billion and $11.5 billion. Stronger-than-expected Sovaldi sales have also helped Gilead shares in a year when biotechnology stocks have generally struggled. Year-to-date, Gilead shares have gained around 22.50%.

While Sovaldi's broad acceptance has allowed Gilead to double its revenue guidance for 2014, the high price of the treatment has also sparked a controversy.

Controversy over Pricing

Sovaldi's high cure rate is a major step forward in the treatment of hepatitis C. However, it comes at a price. A Sovaldi pill costs $1,000. A 12-week treatment costs $84,000. After taking into account the cost of two other medications that patients must take along with Sovaldi, the total cost of treatment rises to $100,000.

While Sovaldi's high cure rate is good news for patients, the high price means that getting an insurance approval is not easy. As per estimates from Andrea Branch, a hepatitis C researcher at the Icahn School of Medicine at Mount Sinai in New York, curing every U.S. patient with Sovaldi and companion drugs could cost $400 billion. As per government data, the U.S. spent $263 billion on all prescription drugs in 2012. Not surprisingly, government and insurers have raised the issue of high cost of treatment.

Senators Ron Wyden (D-Ore) and Charles Grassley (R-Iowa) have asked Gilead to provide a detailed explanation of its pricing. The senators say that Pharmasset, which originally developed Sovaldi, noted in filings with regulators that Sovaldi's estimated treatment cost was $36,000. The estimated cost was given at the time when Gilead was in talks to acquire Pharmasset.

The big question is whether Gilead is justified in keeping the high price for Sovaldi. Given the role Sovaldi is likely to play in deciding Gilead's fortunes, this is a crucial question.

High Price is Justified

The senators have raised a valid point. However, Gilead is justified in keeping a high price for Sovaldi. The simple reason is the high cure rate for the drug. If left untreated, hepatitis C can eventually kill. On the other hand, the average cost for a liver transplant is $577,000 - much, much higher than Sovaldi's price.

Also, forcing Gilead or any biotechnology company to lower price for a drug that has such high success rate would hamper innovation.

Another important point raised by Gregg Alton, Gilead's Vice President, at a public forum sponsored by the American Enterprise Institute, was that earlier medications for hepatitis C take longer to treat and are not as effective as Sovaldi. According to Alton, the estimated cost-per-cure for older hepatitis C treatment is between $150,000 and $200,000, which is higher than that for 12-week treatment with Sovaldi and companion drugs.

Maintaining High Price Very Crucial for Gilead

Gilead certainly has valid reasons to keep the price for Sovaldi high. Maintaining high price for Sovaldi is crucial for Gilead's future prospects, given the drug's huge potential. If Gilead's estimates are met, Sovaldi would account for around 50% of the company's net product sales. Assuming this, a 10% drop in Sovaldi price would result in a 5% drop in net product sales.

A 5% drop in net product sales will not have a significant impact on Gilead's prospects.

However, the senators who have raised the issue of high cost of Sovaldi have cited the $36,000 estimated treatment cost from the 2011 Pharmasset filings with regulators. That is over 50% drop from the existing treatment cost. A 50% drop would mean a 25% drop in net product sales. Such a drop would certainly worry Gilead investors.

However, it is unlikely that Gilead will be forced to reduce treatment cost by so much for the reasons I have noted above. At worse, Gilead could see 10-15% drop, which will not significantly hurt the company.

Disclosure: The author is long GILD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.