Hate to say it...But I told you so
Earlier this month I wrote an article arguing that Gilead's (NASDAQ:GILD) HCV franchise had likely peaked in terms of sales growth in the developed world, and that rising competition would soon force an erosion in Harvoni margins or market share. Yesterday's expected approval of Merck's 12-week once daily HCV therapy Zepatier for Genotypes 1 & 4 and the aggressive pricing of the therapy at a list price of $54,000 per course of treatment, affirms my earlier view of the HCV market and suggests my initial analysis may have been too optimistic for Gilead Bulls.
Identical Treatments for the Most Commons Infection
The FDA's priority review of Zepatier (elbasvir and grazoprevir) has made it clear that for genotype 1 and 4 HCV patients, there is no difference in the effectiveness of the therapy versus Gilead's Harvoni. Both therapies have demonstrated nearly identical SVRs of over 90% over 12-week courses of treatment. In addition, Zepatier will also have the same ease of use of Harvoni, which is to say a single pill once a day instead of AbbVie's multi-pill twice daily therapy. While it is likely that there may be a slight physician preference for Harvoni due to the drug's first to market status and the comfort level that often engenders with physicians, this will likely prove temporary.
Gilead bulls will also likely point to the recently submitted NDA of Gilead's pan-genotypic HCV treatment (sofosbuvir and velpatasvir) that, if approved, would do away with the need for genotype testing and thus create a competitive advantage over the just approved Zepatier. These hopes are likely overdone as genotype testing is currently performed and thus unlikely to be seen as an unbearable burden to treatment, and the majority of HCV infections in the high margin developed world patient population are genotypes 1 and 4. This includes North America, Western Europe, and Japan.
Payer and Political Pressure
Gilead and other drug companies have been subject to ever-increasing payer and political pressure over the price of their products. Notably, both leading candidates in the Democratic Presidential primary race and the leading Republican have made their support for government negotiations of drug prices well known. Massachusetts became the latest state to join the growing outcry this week over the outsized impact that HCV drugs in particular are having on state Medicaid budgets. The state even went so far as singling out Gilead in a letter made public that asks for both pricing information and specifically requests the company lowers its pricing. While it is true that presidential candidates and exasperated state health leaders and Attorneys General currently have little power to change the pricing of HCV drugs in the short and medium term, the growing outrage is likely to place a sort of ceiling on drug prices as drug developers attempt to straddle the difficult line between maximizing shareholder value and thumbing their nose at the major payers of their product.
With the approval of Zepatier, private payers now have a true competitor to leverage in order to drive further price concessions from Gilead. Last year, the company shocked the analyst community by announcing that Harvoni price concessions would likely rise above 40%. Now that Merck has given a list price for its comparable product at essentially the discounted price of Harvoni, it seems clear that the only direction for Harvoni pricing in the U.S. is down.
A Simple Idea
Gilead has been able to reap approximately 18 months of jaw dropping sales and earnings gains with their first to market sofosbuvir based HCV regimens. The heyday of sofosbuvir based regimen profitability is now over and investors should expect sales from Gilead's HCV franchise to moderate in the developed world and for margins to dramatically decline. While Medicare is unable to negotiate on HCV pricing, the market is doing so at a relatively breathtaking pace. Competition will continue to pressure Harvoni margins throughout 2016 and beyond. In the end, it is a fundamental principle of a free market: Competition leads to lower prices. It was true when AbbVie's Viekira Pak was approved in December of 2014 and it will certainly be true with the entry of Zepatier into the HCV market.
Investors should expect little to slightly negative Harvoni sales growth in 2016 in the developed world and an increase in pricing discounts in the wake of the approval of Merck's Zepatier. Gilead's reliance on its Sofosbuvir based HCV regimens for sales and earnings growth over the past 18 months, and the pending erosion of margin or market share for its key product in the HCV space, should lead the dispassionate investor to expect further declines in Gilead's share price.
Disclosure: I/we 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.