Gilead shares have been sliding all year, as new competition keeps the pressure on the company's hepatitis-C treatment, Harvoni.
Harvoni costs $94,000 ($1,125 per pill) for a 12-week treatment. The drug is for the major subtype of hepatitis, genotype 1, which accounts for about 70% of hep-C cases. Company officials argued that Harvoni is actually less expensive than other treatments because many patients could get away with just an 8-week regimen. An 8-week program generally costs $63,000. Hep-C medicines are typically taken with other drugs that can push the total cost of treatment to over $120,000.
Ironically, the company's aggressive pricing strategy backfired. In the last three years, other drug makers have rushed in with lower-priced drugs and have taken aim at Gilead's 85% market share.
In Gilead's second quarter, sales of the company's hep-C franchise posted revenue of $4 billion. Investors were expecting sales of $4.1 billion. The miss was driven by lower-than-expected sales of Harvoni. In the quarter, Harvoni was beset by price erosion, a lower number of patient starts and shorter treatment durations. And to top it all off, the government of Japan forced the company to cut the price of Harvoni and Sovaldi by 32%.
Merck's (MRK) - Get Report recently approved medication, Zepatier, has a narrower label indication than Harvoni, but Merck is pricing the drug much lower (below $30,000) in an effort to compete on price. Zepatier hasn't been approved for patients with moderate-to-sever cirrhosis, but Harvoni's label was expanded last year to include those late-stage patients for which Zepatier is not approved.
Analysts are expecting third-quarter sales of $7.45 billion and earnings of $3.08 per share.
Investors have been watching the ratio between commercial payers and Medicare Part D carefully. Last quarter, Gilead said the ratio dropped to 55% from 64% in the first quarter and 77% in the fourth quarter of last year. Many analysts believe by next year, Medicare and Medicaid will be the largest customers for hep-C drugs, and the stickiness of the Gilead's pricing will collapse.
Sales for fiscal 2016 are expected to be down 7% to $30.34 billion. Fiscal 2016 earnings of $12.20 per share should be down 3.2%, supported by share buybacks. In the first half of 2016, the company repurchased $9 billion worth of stock. Gilead has $11 billion remaining on its repurchase authorization.
In my opinion, prescription and pricing trends seem to be stabilizing. Along with a low valuation (between 7 and 8 times 2016 earnings), Gilead shares have probably bottomed. For the stock to go higher, investors have to change their focus from hep-C to the company's drug pipeline. Until that happens, there's no cure for this stock.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.