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GILD: Tremendous Upside Remains

GILD's sofosbuvir is approved, and scripts are being written and approved (even in combo with JNJ's simeprevir, according to one hepatologist, and this combined therapy should cost over $120,000). The first script data for sofosbuvir should come out next week, reflecting its first week on the US market.

For 2014, consensus revenues are $2.8 billion, whereas my estimate is $8 billion. As only 2 new drugs have been approved, with pricing announced, there will be no possibility of a price war.

At current valuation for GILD's stock, I believe that the Street is assuming a significant price war to occur between GILD and ABBV, for GILD's FDC of sofosbuvir and ledipasvir, versus ABBV's multi drug regimen. Both regimens have been shown to be extremely effective in treating Genotype 1 patients, though GILD's has advantages with respect to drug-drug interaction, convenience and side effects, as well as the fact it should be first to market.

My thoughts are as follows: First, I believe that Street estimates for the number of patients to be treated are vastly understated. As prescription data begins to flow in over the next month, analysts will reextrapolate their projections, and this will alleviate some of the concern. Furthermore, the ABBV regimen is unlikely to be approved before the end of 2014, and a small percent of patients will be excluded from possible treatment due to one of the drugs involved. My estimates for GILD's sofosbuvir revenues are based on a realized price 20% below the announced level.

Investors are, in my opinion, missing out potentially on a 100% move in GILD's stock (not giving credit to the oncology pipeline) based on an underestimation in patient Hepatitis C volume and the possibility of a "price war". I note again that I have already discounted sofosbuvir pricing by 20%. I note that current therapy for Hepatitis C costs about the same as GILD's announced pricing ($70,000-90,000), yet it is not as effective, involves more side effects and is more difficult to administer. Furthermore, as I stated, doctors have started prescribing the two available drugs, sofosbuvir and simeprevir, which cost well in excess of $100,000. The difference between a 70% cure rate and a 95% cure rate is huge, as one must consider the inverse, ie 5% failure rate vs. 30%. The cost to treat the complications of Hepatitis C are significant, and pharmacoeconomic data exists that supports the cost effectiveness of therapy. This does not, in my opinion, argue for a price war.

In conclusion, I shall readily win the volume argument. The pricing discussion remains open, but if there is no war, the upside in GILD's stock, independent of its other pipeline, is great.


Disclosure: I am long GILD, JNJ. 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.