Gilead (NASDAQ:GILD) has been in the news regarding their HCV drugs (Sovaldi and Harvoni) for much of the past few years. First, it was a savior for HCV patients and a true breakthrough therapy. Based on the breakthrough nature, more patients came out of the woodwork for treatment than generally anticipated generating huge profits for Gilead. Organizations started voicing arguments against Gilead for price gouging despite the fact that the efficacy of their regimens was superior to the first line therapies of that time, and prescribed at the same price for the total regimen. The issue wasn't really the cost, it was the volume.
As the HCV revenue grew, other companies smelled the money and turned up the innovation engine to chase it. The main players were AbbVie (NYSE:ABBV), Merck (NYSE:MRK), Bristol-Myers Squibb (NYSE:BMY), and Johnson & Johnson (NYSE:JNJ). JNJ was first to compete with Olysio but that was short lived once Harvoni was approved. AbbVie took the first major shot at Gilead from a combo perspective with the approval of Viekira Pak. Viekira Pak was an inferior regimen compared to Harvoni. This was clearly detailed in a prior article. Viekira Pak had lower SVR rates in GT1A patients (similar in GT1B patients) and was a multi-pill regimen compared to Gilead's Harvoni (single pill, once daily). The real issue was the fact that Ritonavir and ribavirin were needed for many patients taking Viekira Pak. With an inferior regimen, AbbVie still wanted to cash in resulting in a price war with Gilead for exclusive use with pharmacy benefit managers (PBMs). AbbVie struck first making a deal with Express Scripts (NASDAQ:ESRX) and Gilead basically ran the table after that making deals with CVS (NYSE:CVS), Anthem (NYSE:ANTM), and others. This caused a drop in regimen price but a continued level of heavy profit by Gilead based on high volumes. Unfortunately, this forced patients into using AbbVie's Viekira Pak despite the increased risks. I voiced this concern in a previous article that Ritonavir and ribavirin were potentially dangerous drugs coupled with this therapy. Unfortunately, I was correct and multiple patients with HCV and cirrhosis died while using AbbVie's regimen. Viekira Paks label was then changed by the FDA with "a recommendation for physicians to assess evidence of hepatic decompensation prior to treatment and during treatment in cirrhotic patients".
Let's fast forward to this week:
AbbVie's lower sales of Viekira Pak reported in their fourth quarter earnings should not shock you in the least, based on the human tox findings I spoke about, and really should have no effect on Gilead's Q4 earnings. AbbVie has <6% market share in GT1 patients and it is not shocking that doctors are guiding potentially affected patients away from AbbVie's Viekira Pak and toward Gilead's Harvoni based on medical risk. This can be achieved despite PBM agreements with a doctor's note or petitions for health or safety reasons.
What about Merck?
If you didn't think Merck's combo was going to be approved, you've been hiding somewhere. I presented 9 months ago that Merck's combo is equally effective to Gilead's Harvoni in GT1 patients and is also a one pill, once daily option. This puts their regimen in a similar class with Harvoni and superior to Viekira Pak for GT1 patients. What about pricing? Ken Frazier, CEO of Merck, and his team are very smart. Why set a list price for their regimen at $95k and get bad press just to discount the price by 40%-50% anyway to be competitive with Harvoni pricing with PBMs? Instead, Merck avoided the bad press and set a list price for Zepatier at $54,600. This price is in the neighborhood of the PBM's negotiated price with Gilead for Harvoni and allows room for a slight discount for PBMs from the list price to entice volume discounts and obtain formulary status.
Is Merck's approval starting a new price war with huge discounts?
Probably no. Remember, Merck has no reason to hugely discount Zepatier to obtain market share. Zepatier looks very similar to Harvoni and is superior to Viekira Pak both on convenience and safety. Merck needs a similar price target to Gilead's Harvoni to reap large profits in the space which are estimated at $2B. Large discounting would make Merck's sales objectives much more difficult as many PBM's are not going to go away from Gilead's Harvoni. Remember, Merck lost the early war with Victrelis a few years ago to Incivek. Merck doesn't want to be a loser again. It needs to cash in and a price war hurts its chances.
Take home message:
Not much has really changed in the HCV space for Gilead with the approval of Merck's Zepatier yesterday and the lower Viekira Pak sales in Q4. It is unlikely that a price war will take place and the drop in Viekira Pak sales is due to safety concerns. The HCV space is ever changing with Gilead, Merck, and AbbVie coming out with new and improved regimens in the next year or two. Gilead's pan-genotypic inhibitor that is under review (PDUFA date June 2016) is still the front runner as it is extremely efficacious against all genotypes. No other company currently has this and provides Gilead with the clear advantage for the future. My opinion is to buy Gilead on extreme weakness here that is relatively unwarranted based on the future of HCV revenues. Patient investors will be rewarded. You can be sure that Gilead's management is buying back shares aggressively at this price to boost the stock and probably will increase the dividend when they report next week.
Disclosure: I am/we are long GILD, MRK, BMY.
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.