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Updated at the bottom with additional information and analysis.

Controversy over the $1,000-per-day cost of Gilead Sciences' (GILD) - Get Gilead Sciences, Inc. Report hepatitis C drug Sovaldi is rippling through the biotech sector Friday and causing a significant sell off.

The Nasdaq Biotechnology Index (NBI) is down 3% to 2602 in Friday trading. The index is still up 10% for the year but it was up as much as 20% at the end of February.

Friday's broad biotech selloff was apparently sparked by a letter from three members of Congress, requesting a briefing from Gilead CEO John Martin about Sovaldi's price tag and its economic effect on public and private insurance. The letter states, in part:

Our concern is that a treatment will not cure patients if they cannot afford it. Reports indicate that Gilead intends to sell Sovaldi at $84,000 per treatment. In cases where Sovaldi is prescribed with other treatments the costs could be even higher. According to a recent Reuters report, "many doctors are requesting a $150,000 combination of Sovaldi ... and Olysio."

These costs are likely to be too high for many patients, both those with public insurance and those with private insurance. Because Hepatitis C is "concentrated in low-income, minority patients," the affordability problems are likely to be particularly acute for state Medicaid programs and those patients served by these programs. Colorado and Pennsylvania have already announced that their Medicaid programs will be limiting use of the new drug to "only the sickest patients," such as those already suffering from liver disease. California's Medicaid program is still considering how and when to reimburse for the drug. The large pharmacy benefit manager Express Scripts has said it is "encouraging some doctors in its networks to delay prescribing Sovaldi." Even in cases where public or private insurers pay for the medication, it will impose substantial costs on taxpayers and could cause premium increases for those with employer or individual coverage.

The biotech sector is in the midst of an unprecedented investment boom thanks to the successful clinical development and approval of new drugs. But pushback on drug pricing by private insurers and government healthcare agencies like Medicare and Medicaid is a huge worry for investors. Even if Gilead can justify the cost of Sovaldi, the negative headlines and criticism now being focused on drug pricing is spooking investors, particularly generalist investors who don't understand the intricacies of the sector well and may be the first to flee at early signs of trouble. 

"Generalists like biotech because of pricing power. Any threat to that hits the sector," one healthcare hedge fund manager told me.

Said another healthcare investor: "I think the group has been acting weak  and Gilead sparked the sell off. I think Gilead will be able to justify its case and really make the point of the difference between cures and eradicating the disease and how much that is going to end up saving the system. As for the sector, this is going to have an effect because people are going to see that they have to stop pushing the envelope with pricing. There is going to be major pushback, so it is a wake-up call to everyone."

Some healthcare investors have been arguing that the biotech sector's rise has been too far, too fast and large unjustified based on valuation. For them, today's selling is welcome. 

"Biotech investors don't like pricing issues because then they cannot measure the peak sales of every early-stage drug in the billions of dollars," one such biotech fund manager told me, with a heavy dose of snark.

Friday's selling was broad. Gilead shares are down 3% but other the other large caps Biogen Idec (BIIB) - Get Biogen Inc. Report, Celgene (CELG) - Get Celgene Corporation Report and Amgen (AMGN) - Get Amgen Inc. Report are in the red, too.

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The $84,000 "sticker price" of Gilead's hepatitis C pill Sovaldi actually compares quite well to the current competition, said ISI Group analyst Mark Schoenebaum on a call with investor clients earlier today. 

By "sticker price," Schoenebaum means the full list price of the drug, before discounts or rebates. Think of it like the sticker price of a car, which no one ever pays because buyers and dealers haggle over a final price. 

The sticker price for Vertex Pharma's (VRTX) - Get Vertex Pharmaceuticals Incorporated Report Incivek is $100,000 while Merck's (MRK) - Get Merck & Co., Inc. Report Victrelis costs $80,000, said Schoenebaum. 

The "net price" for all these Hep C drugs is lower by 5-25% depending on the discounts negotiated by Medicare and private insurers. And Sovaldi's real-world value -- price per Hep C cure, for instance -- is superior because the drug is more effective and less toxic than Incivek and Victrelis.

How does this current controversy end? 

No one knows for sure, of course, but by inflicting a "public shaming" on Gilead, Washington politicians may force the company to walk back from future price increases, said Schoenebaum. There is little Congress can do right now to force FDA to lower the price of Sovaldi, and FDA, by law, is not allowed to consider drug pricing when reviewing or regulating drugs. 

Remember, the launch this year of Sovaldi was just stage one for Gilead. Later this year, the company will roll out the combination of Sovaldi and ledispavir, formulated into a single pill. The Street expects Gilead to price the next-generation therapy at around $100,000. Whether or not Gilead concedes on that price remains to be seen. 

Don't forget, too, that competition for Hep C patients is coming from the Abbvie (ABBV) - Get AbbVie, Inc. Report-Enanta (ENTA) - Get Enanta Pharmaceuticals, Inc. Reportpartnership, which is expected to launch its own all-oral therapy soon. Merck and Bristol-Myers Squibb (BMY) - Get Bristol-Myers Squibb Company Report are not too far behind. 

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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