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Gilead Stock: This Beatdown Was Way Overdone (GILD)

Gilead Sciences was driven down by a competitor's move, but the market may have overreacted

Gilead Sciences, Inc. (GILD) stock tumbled nearly 20% in less than a week — the kind of drop that can be just as inviting as it is alarming to investors. You can thank rival drug maker AbbVie Inc (ABBV), which scored a pricing advantage in the battle for the lucrative hepatitis C drug market.

Gilead Sciences NASDAQ:GILDExpress Scripts Holding Company (ESRX), a pharmacy benefit management company, or PBM, chose Abbvie’s new hepatitis C drug Viekira Pak for its formulary, an influential list healthcare providers use to determine which drugs they’ll pay for.

This means that GILD’s new hepatitis C drug, Harvoni, may now miss out on a portion of the 3 million patients in the U.S. and 150 million afflicted globably.

Drug Wars

GILD already has a recently developed, effective hepatitis C drug on the market — Solvadi. In 2014 alone, Solvadi has generated nearly $1 billion a month in sales. It’s estimated that nearly 30% of hepatitis C patients will still need to take the drug, even after the development of the newer treatment, Harvoni.

The new Harvoni drug is regarded as an improved generation of treatment over most previous drugs, as is Solvadi — both have superior ease of use, cure rates and lack of side effects. Harvoni also is considered by many in the industry to be superior to AbbVie’s Viekira Pak, despite Express Scripts’ nod.

So why did ESRX side with AbbVie?

The cost of hepatitis treatments is high. A complete course of treatment of Solvadi is $84,000, and Harvoni costs more than $94,000. The apparent willingness of AbbVie to offer payers a discount on its Viekira Pak no doubt made the deal attractive to Express Scripts. Plus, patients under most health insurance plans ultimately must pay some of the cost out of pocket.

Still, there obviously is an enormous pool of revenue and will remain so in the hepatitis drug treatment market.

From Treatment to Sales

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The market smashed Gilead stock on the AbbVie news, taking it from above $108 to below $90. Many assumed that the move by Express Scripts to choose Viekira over Harvoni would seriously damage market share and revenue for GILD.

However, in a Barron’s article by Johanna Bennett, Morgan Stanley analyst Matthew Harrison is quoted as suggesting that Gilead’s share of revenue in the hepatitis treatment market likely still will be 75% — that it won’t fall to the 55% suggested by the drop in stock price.

In short, Viekira won’t have nearly the impact that Wall Street has baked in.

Also, one of the industry factors largely overlooked in the stock market’s reaction of broad-based selling of Gilead stock was that GILD still has a wide range of avenues available with other PBMs. Although Express Scripts is significant in size and scope, there still are thousands of hepatitis C patients who aren’t under its formulary, and thus will be potential users of Gilead’s treatments. So this, too, will be a factor in firming up Gilead’s hepatitis treatment market share and total revenue.

Merrill Lynch downgraded Gilead stock and dropped its price target from $130 to $87. The gist of the Merrill Lynch argument is that AbbVie fired the first shot in what will become a price war that will significantly wound the overall body of revenue in the hepatitis C treatment market.

However, the threat to the Gilead’s revenue from its hepatitis drugs is overstated. While AbbVie made considerable inroads via its deal with Express Scripts, GILD should retain a significantly high amount of market share.

Gilead stock certainly doesn’t deserve the beating it has taken. GILD did $11 billion in sales in 2013 and is expected to do $24 billion this year. Analyst estimates call for $28 billion in 2015. With its cutting edge Solvadi and Harvoni, as well as other hepatitis drug treatments in development, it’s expected to extend its vigorous product line. Gilead also produces HIV drugs along with a wide variety of other important drugs, so isn’t solely dependent on its hepatitis drugs.

Bottom Line

The upside of all this turmoil? Better valuations for new money. Gilead stock now sells at about 17 times earnings, less than some of its biotech competitors such as Amgen, Inc. (AMGN), which sells at nearly 26 times earnings.

Gilead stock’s strong fundamentals and growth prospects, especially in light of the market’s overreaction to the potential competitive threat from Abbvie, add up to a significant buying opportunity for investors.

 As of this writing, Greg Sushinsky did not hold a position in any of the aforementioned securities.

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