Biotech stocks are volatile investments to begin with, and the space has gotten even choppier this week on news that the largest manager of U.S. prescription-drug benefits is limiting choices for patients with hepatitis C.
Express Scripts Holding Co. (ESRX) announced Monday that it will make AbbVie Inc. (ABBV) its sole provider of hepatitis C treatments, marginalizing Gilead Sciences Inc. (GILD) and its blockbuster treatment Sovaldi.
The move is controversial for a number of reasons. For starters, the fact that ESRX is limiting choices for patients as a way to control costs rankles some healthcare experts. Yes, Sovaldi reportedly costs over $80,000 for a 12-week treatment cycle, and Express Scripts has negotiated a significantly lower price from AbbVie on its multidrug Viekira Pak. But the fact that a drug company is effectively shutting down one drug in favor of another seems dangerous to some physicians and patient rights advocates.
It’s also controversial because the bottom line impact is quite real for Gilead Sciences. Sovaldi, had sales of $8.5 billion in the first nine months of the year, according to reports. That’s a huge chunk of the company’s revenue and any modest drawdown in sales will have a serious impact on GILD stock.
So what should Gilead Sciences investors do?
GILD Stock is In Trouble
Unfortunately, there isn’t much that can be done in order to mitigate the impact here. The only real question is whether the negativity has been priced in enough now that the stock has sold off sharply.
The move will happen quickly, taking effect Jan. 1 and will apply to some 25 million Express Scripts customers who contract through the benefits provider. That’s a big potential pool of customers for GILD, and thus the quick sell-off in shares seems justified.
The only reason to stick with Gilead at this point, then, is because you think the impact will be less than expected or because you think that the other things GILD has going on will offset these losses. The drug pipeline at the biotech stock, for instance, holds promise with new treatments for HIV/AIDS, certain kinds of cancer and liver disease; should these trials go well, Gilead could tap into big new sales in 2015.
But that’s a risky proposition and one that has downside as well, should the treatments not pan out.
As much as I like healthcare as a long-term play, I don’t know if it’s worth being patient with Gilead after this big plunge and the lack of hope for a rebound in hepatitis treatment sales.
GILD stock is battered and will take some time to heal. Investors who have the flexibility to move their money may want to abandon this biotech stock for a better play in the sector before the declines get worse.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
