Why I Am Not Selling Gilead

Summary

• AbbVie’s hepatitis C treatment was approved by the FDA last Friday.
• AbbVie and pharmacy benefit manager Express Scripts have reached an agreement under which AbbVie’s hepatitis C treatment has been given exclusive status in return for significant discount.
• Gilead shares have tumbled on the news, however, the impact of the agreement could be minimal on Harvoni sales.

AbbVie's (ABBV) hepatitis C treatment was approved by the FDA last Friday and as expected, the company did not significantly undercut the price of Gilead's (NASDAQ:GILD) Harvoni. The treatment cost of AbbVie's Viekira Pak is $83,319. This is around $10,000 below Gilead's single-tablet regimen of Harvoni. However, what has taken everyone by surprise is pharmacy benefit manager Express Script's (ESRX) deal with AbbVie.

This morning Express Scripts announced that it has reached an agreement with AbbVie under which the drug maker will significantly discount Viekira Pak. In return, AbbVie has been awarded exclusive status by Express Scripts. Express Scripts, which is the largest pharmacy benefit manager in the U.S., has dropped Gilead's Harvoni from a list of approved and covered drugs that is applicable to 25 million Americans.

At first glance, this looks like a serious setback for Gilead. The company's shares, as I discussed last week, have surged this year on the back of Sovaldi and Harvoni sales. Sovaldi has already achieved blockbuster status, while Harvoni is expected to do so in the current quarter. It is not surprising then Gilead shares were down nearly 15% by mid-day trading on Monday. The sell-off though is an overreaction, which is why I am not selling Gilead.

My argument for holding on to Gilead is that at this moment it is difficult to assess how much of the market share AbbVie's hepatitis C treatment will gain at the expense of Harvoni. Both Express Scripts and AbbVie have not disclosed the discount they are offering on Viekira Pak. The 12-week treatment cost of Harvoni is $94,500, treatment naïve patients (around 40% of eligible patients) may be considered for an 8-week treatment, the cost for which goes down significantly.

But more importantly, Harvoni is a single-tablet regimen, compared to AbbVie's four to six-tablet regimen. This means that compliance will be a major issue for AbbVie's hepatitis C treatment. Having been a medical practitioner, I would always recommend a treatment option that is easier to comply with. I expect medical practitioners in the U.S. to do the same when it comes to recommending between Harvoni and Viekira Pak. And therefore, despite the pricing agreement between AbbVie and Express Scripts, the impact on Harvoni sales could be minimal. I would definitely wait and watch for now to see whether AbbVie is successful in its strategy.

Another issue with AbbVie's treatment is that some of the patients may require ribavirin, which has side effects. This of course is not the case with Harvoni.

Finally, the focus has been on Sovaldi and Harvoni because of the magnitude of their success. However, Gilead has also seen strong demand in its HIV business, as noted by Paul Carter, EVP Commercial Operations, during the company's earnings conference call. In addition, there is the company's oncology program, which has tremendous potential. The market reaction though after the Express Scripts/AbbVie agreement has been as if Gilead is a one-drug company.

If anything, I see the sharp pullback as an excellent opportunity to add Gilead shares. Even if AbbVie has any impact on Harvoni sales, it would not likely be significant due to reasons I have discussed above. In my opinion, the bullish case for Gilead remains intact.

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.