NEW YORK (TheStreet) - Gilead Sciences' (GILD) stock plunged again Tuesday following Sunday night's announcement that Express Scripts (ESRX) had struck an exclusive deal with AbbVie (ABBV) to distribute its just-approved hepatitis C therapy, which would replace Gilead's own Hep C drugs.
As part of the agreement, AbbVie agreed to significantly discount the price of its Viekira Pak hepatitis C therapy in exchange for exclusive access to Express Script's 25 million customers. Starting Jan. 1, Gilead's competing hepatitis C drugs, Sovaldi and Harvoni, will be excluded from Express Scripts' formulary. The deal covers patients with genotype 1 hepatitis C, the most common form of the liver disease in the U.S.
The news spooked Gilead investors, with shares dropping 14% on Monday. The stock was falling an additional 4.5% to $88.73 on Tuesday with about 46 million shares changing hands, more than triple Gilead's three-month average daily trading volume.
Shares of AbbVie were down 4.1% to $64.22 at last check. Express Scripts shares were up 3.4% to $85.11.
Here's what analysts said about Gilead.
Cory Kasimov, J.P. Morgan (Overweight; $121 PT)
Bottom line, we have been increasingly concerned about the sustainability of branded drug pricing in the US market, and today's developments/call reinforce those fears above and beyond pricing pressures specifically related to GILD (as we had already factored fairly significant price erosion into our model).
The duration of the multi-year agreement hasn't been disclosed, but we think ABBV has this formulary position on lockdown for the unknown duration. When asked whether GILD could still negotiate its way back on formulary, [Express Scripts CMO Dr. Steve Miller] noted that the contract needed to make sense to both ESRX and ABBV, and "rest assured" that "ABBV was a tough negotiator." We take that to mean GILD is likely stuck where it is with ESRX for the time being (despite the company's contention to us that they are still in dialogue.
That said, Dr. Miller did note there are GT1 pts who may require Harvoni, and ESRX doesn't intend to put up excessive barriers in these pts. In addition to pts who can't take Viekira Pak due to concomitant meds/contraindications, Dr. Miller noted pts of other GTs will still be treated with GILD's products (Sovaldi is approved in GT 1, 2, 3 and 4; we expect GT 3 could be added to Harvoni's label this year). The focus is on GT1, however, given it represents ~75% of pts in the US. Given the lack of "excessive barriers" for pts with medical exceptions, we wonder just how difficult it will be for docs to Rx Harvoni in practice and how much effort would be put forth to find out.
Thomas Wei, Jefferies (Hold; $84 PT)
Express Scripts' decision to exclusively offer its genotype 1 HCV infected patients ABBV's Viekira Pak was in line with our expectations after a year of outspoken anti-GILD protests from ESRX management. Nonetheless, the stock reaction suggests investors see heightened risk of price and market share competition than previously expected, but whether other payors covering the other 95% of U.S. HCV patients will follow suit is uncertain.
Express Scripts (ESRX, Buy) has reached an agreement with AbbVie (ABBV, Buy) to offer only recently-approved Viekira Pak to the 25m Americans whose employers contract with ESRX directly. This represents roughly 28% of the 90m Americans ESRX covers, and likely represents ~5% or less of the U.S. HCV population. While the exact level of discounting was not disclosed, ESRX has said that it significantly narrows the gap between prices paid in the U.S., where Viekira is listed at $83,319, and Western Europe, where Sovaldi sells for $50,000-$70,000 in some countries. We are not surprised by this development, as ESRX has been outspoken in its criticism of GILD and its pricing tactics.
GILD Still Has An Incrementally Better Package To Offer To Payors, But The Differences In GT1 Are Narrow. Viekira Pak (ombitasvir/ paritaprevir/ ritonavir/dasabuvir) was approved last week for the treatment of genotype 1 HCV, with or without ribavirin (RBV). The label recommends a 12-week treatment course for all patients, except those genotype 1a patients who have cirrhosis. This creates certain populations in which the ABBV regimen is shorter, but this is ultimately offset by ABBV's lack of coverage of other genotypes (which GILD can treat and try to bundle with Sovaldi), as well as longer treatment duration in other populations, a greater number of pills and increased dosing frequency. Our current GILD model assumes that competition results in 30% share to other competitors and 20% price discounting in the U.S. We continue to highlight this as one of several risks to our GILD valuation, as there could be downside if other payors follow ESRX's suit, particularly when next-generation regimens close the clinical gap with Harvoni.
Robyn Karnauskas, Deutsche Bank (Buy; $125 PT)
Express script's decision to block Harvoni in GT-1 pts completely has ignited a price war in the HCV market, in our view. We are lowering our HCV numbers for GILD & model higher discounts to compete with Abbvie pricing. We estimate GILD gross to net would now be ~30% (vs. 18% prev). We also assume 5% lower market share for GILD in 2015 & out-years. This lowers our PE based TP to $125 (prev $142) & DCF based NPV to $90/sh (prev $108). New TP $125. We believe at current price of ~$95/sh, GILD is trading close to our DCF value which gives no credit to pipeline. Pipeline readouts in 2015 & capital allocation could drive upside in 2015. Buy
TheStreet Ratings team rates GILEAD SCIENCES INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:
"We rate GILEAD SCIENCES INC (GILD) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and notable return on equity. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- GILD's very impressive revenue growth greatly exceeded the industry average of 40.9%. Since the same quarter one year prior, revenues leaped by 117.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
- Powered by its strong earnings growth of 255.31% and other important driving factors, this stock has surged by 43.41% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, GILD should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- GILEAD SCIENCES INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, GILEAD SCIENCES INC increased its bottom line by earning $1.83 versus $1.64 in the prior year. This year, the market expects an improvement in earnings ($7.96 versus $1.83).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Biotechnology industry. The net income increased by 246.3% when compared to the same quarter one year prior, rising from $788.61 million to $2,731.27 million.
- The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Biotechnology industry and the overall market, GILEAD SCIENCES INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: GILD Ratings Report