The markets knee-jerk reaction to Express Scripts excluding Gilead Sciences' (NASDAQ:GILD) Harvoni and Sovaldi from their national formulary is overblown. While Express Scripts covers a substantial number of patients, approximately 25 million, the number of HCV patients is substantially less. In addition, there are millions of HCV patients internationally, where Gilead clearly has an advantage. The company has a top-notch management team, which has built an impressive pipeline, including several late-stage drugs that should come to market within the next few years. Management has also made keen hiring moves, which has signaled a serious commitment to the oncology space. While Gilead may be closed out of the Express Scripts patient base, ultimately, across the entire HCV universe, the superior product will prevail. Finally, the stock is still very cheap, even after accounting for the loss of some revenue share to AbbVie (NYSE:ABBV). None of this analysis includes Gilead's other therapies, including the HIV franchise, which accounts for roughly 53% of the company's revenues, nor does it take into account the forthcoming one-pill HIV treatment TAF, which will probably be approved in late 2015. Though pricing concerns have added some risk, I believe the stock offers an excellent investment opportunity and will reach $120 by mid-year and $150 by year-end 2015.
Express Scripts, AbbVie and Market Share
Express Scripts' exclusion of Gilead's products is no small matter. The company covers 25 million patients, and of course, some of these patients probably have diagnosed or undiagnosed HCV. It is impossible to know how many, but we can extrapolate estimates of the total US population and apply those percentages to Express Scripts' patient base. It is estimated that there are approximately 3.2 million people in the US infected with HCV. Approximately 170,000 patients are diagnosed with the disease each year, which represents .00053% of the US population. If we apply this same percentage to Express Scripts' patient population we get 13,240 HCV patients. The average cost of Gilead's HCV treatments is estimated to be $80,000, despite the bombastic "$1,000 a pill!" headlines. In other words, Gilead stands to lose roughly $1.06 billion in sales due to the Express Scripts exclusion. While my calculations are overly simplistic, RBC's Michael Yee, whom I consider to be the most knowledgeable analyst following Gilead, also estimates this event will cost Gilead approximately $1-2 billion in sales.
HCV International Market
The international market for HCV treatment represents great opportunities for Gilead. In Europe alone, the World Health Organization estimates that 15 million people are infected with the disease. In India it is estimated that 12 million people are infected and approximately 170 million worldwide. Gilead has marketing and pricing agreements for Sovaldi throughout Europe and India, where they've already made price concessions. This should all but eliminate competition in these markets. For example, in France, a standard treatment of Sovaldi costs around $51,000, which is the cheapest among the wealthiest European countries. Despite price concessions, the sheer size of these markets should bode well for Gilead's HCV international sales. None of these revenues will be impacted by Express Scripts' actions.
Gilead's Strong Management Team
John Martin and company have a consistent history of making shrewd strategic moves which has resulted in Gilead's current position as one of the most successful biopharma companies in the world. As an investor, this should not be dismissed when assessing the true value of Gilead. The acquisition of Pharmasset in 2011, which resulted in the blockbuster drugs Sovaldi and Harvoni is just one example of the company's competence. More recently, the company has negotiated favorable pricing structures for Sovaldi/Harvoni across its markets. Additionally, the company seems to be committed to becoming a serious player in the oncology market. The recent approval of its first cancer drug, Zydelig, which I discussed in detail in a previous article, shows promise of becoming a significant source of revenue within the next several years. More importantly, this entrée exhibits a commitment on the part of management to move into the highly lucrative oncology space. As further proof of the company's commitment to oncology, Gilead recently announced the hiring of Dr. Pilippe Bishop as Senior Vice-President, Hematology and Oncology Therapeutics. This is an important hire in that Dr. Bishop has vast experience shepherding major cancer drugs to market and has worked previously with the FDA. Analysts believe that Dr. Bishop will head efforts to acquire developmental stage oncology companies. Gilead's management team is a major intangible asset that should not be overlooked by investors.
Superior HCV Product Will Prevail
Ultimately, I believe Gilead will maintain market share in large part due to the superiority of Harvoni/Sovaldi. Although AbbVie's drug Viekira Pak produced similar results to that of Harvoni/Sovaldi in clinical trials, the dosing is very complicated compared to Harvoni's one-pill a day regimen. Patients are required to take a total of four pills with the AbbVie regimen; two pills with breakfast and one pill twice daily also with meals. If ribavirin is required, this usually means six more pills daily. While patient compliance was not an issue in the highly monitored environment of clinical trials, patients left to their own devices over a twelve week treatment period may miss doses. This will result in failed and/or extended treatments, which will increase the cost of Viekira Pak considerably. Additionally, Viekira Pak has a slew of contraindications with many commonly prescribed drugs for other health conditions, including the statins Prilosec, Lasix, Norvasc, Xanax. This means dosing adjustments of Viekira Pak or discontinuation. For more detail, see Doctor RX's fine article here. In addition, there are more serious side effects with Viekira Pak than Harvoni/Sovaldi. When given a choice, I believe a majority of physicians will opt for the treatment that is highly effective and easy to administer.
Gilead's Stock Is Cheap
Even before Gilead's stock was massacred, the stock was relatively cheap. After bottoming last week at just under $86 a share, GILD has recovered to $96 as of this writing, which is still 11% lower than the December 19th close before the Express Scripts announcement and roughly 17% lower than the stock's 52-week high. More importantly, the stock is trading at under 10 times forward earnings and has a PEG ratio of .69. If we take the high end of Michael Yee's estimate of revenue loss due to AbbVie, we get a reduction of $1.67 EPS. Currently the consensus among analysts is that Gilead will earn $9.91 a share. With EPS of $8.24 a share, Gilead currently trades at 12 times 2015 earnings. The average P/E of the three other major biopharmas Amgen(NASDAQ:AMGN), Celgene (NASDAQ:CELG), Biogen (NASDAQ:BIIB) is 19 while these three companies' projected five-year growth rate is 19.4% compared to Gilead's projected five-year growth rate of nearly 24%. If Gilead were to command the average P/E of its peers, the stock would trade at $156 a share. If Gilead ultimately trades at its own five year historical average of 20.17, the stock would trade at $166 share. Remember, these numbers are based on a $1.67 reduction of the current $9.91 consensus estimate. From any vantage point, Gilead's shares are cheap.
The markets have overreacted to Express Scripts exclusion of Gilead from their national formulary. While the company's actions are significant and will impact Gilead, the stock is still substantially undervalued. In addition, there are millions of HCV patients internationally, where Gilead clearly has an advantage. The company's management team is topnotch and consistently makes prudent strategic moves that will continue to transform the company for years to come. While Gilead may be closed out of the Express Scripts patient base, ultimately, across the entire HCV universe, Gilead's superior product will prevail. Finally, the stock is still very cheap, even after accounting for the loss of some revenue share to AbbVie. Though pricing concerns have added some risk, I believe the stock offers an excellent investment opportunity and will reach $120 by mid-year and $150 by year-end 2015.
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