Cash to shareholders no balm for Gilead hep C obsessives

If one is looking for evidence whether Gilead Sciences is viewed as a growth or income stock, look no further than today’s investor reaction to its fourth-quarter earnings call.

The California-based group announced its first-ever dividend and a new share buyback, a manoeuvre that tends to please certain investors and is a sign of a company that is maturing from volatile upstart to stable industry giant. Shares fell nonetheless, following the disclosure that competitive pressure had forced a bigger-than-expected discount on its flagship hepatitis C franchise.

Giving the clearest sign of how intense the price competition is with rival AbbVie, Gilead executives said they expected the gross-to-net sales adjustment for the two products in its sofosbuvir-based hep C franchise, Harvoni and Sovaldi, to be 46% in 2015, double the 22% of 2014. List price on the two agents is $94,500 and $84,000 respectively for a 12-week course.

Commercial chief Paul Carter chalked the increasing discount up to negotiations underway with big health insurers and pharmacy-benefit managers (PBMs) following the entry of AbbVie’s Viekira Pak, as well as a shift toward US public payers like Medicaid and the veterans’ healthcare system, which are receiving rebates of more than 50%.

Gilead won a number of contracts since the bombshell that accompanied US approval of Viekira, when the biggest US PBM, Express Scripts, locked out Gilead’s offerings in the genotype 1 population (Hep C price war evolves into value competition, January 20, 2015). But this has clearly come at a price, as the group has wound back expectations for two of the fastest-launching drugs of all time.

Among the lowered expectations was the company’s 2015 product sales forecast of $26-$27bn, off the $27.8bn in EvaluatePharma'sconsensus. ISI Evercore analyst Mark Schoenebaum cautioned that Gilead management tended to provide conservative guidance. Based on management's comments, Mr Schoenebaum calculated that 2015 hep C sales would be $1-1.5bn less than current consensus.

As for the state of the market, Gilead portrayed a similar picture to AbbVie: 60% of covered lives in the US now under a contract that covers products from Gilead, AbbVie or both; Harvoni and Sovaldi available to 80% of those covered lives; and 40% of the market still left to be fought over.

Seeing the future more clearly

The disclosure, which came after the market closed yesterday, prompted a round of Gilead price target revisions. UBS dropped from $125 to $120, and Leerink from $133 to $120. Shares fell 9% to $97.37 in early trading today. AbbVie stock fell 6% to $57.68.

Shares of hep C companies have been propelled by the assumption of a massive population and the “warehousing” of patients waiting for treatment regimens with better cure rates and fewer side effects.

Gilead and AbbVie have delivered on this promise, but with the launch a clearer picture has emerged – millions of patients are there, but the price has become a barrier to wider adoption in the key US market. Gilead management was quick to point out that the price cuts had been agreed to allow less severely ill patients to receive its pills.

What the Gilead disclosure underscores is that the hep C story has moved from the heady expectations of R&D to the harder reality of commercial launch, and those do not always match up. Consensus forecasts show the Gilead franchise hitting a sales peak next year and then slowly declining. The fate of a product like Vertex Pharmaceuticals’ Incivek – and probably Johnson & Johnson’s Olysio – is instructive here, although clinical advances have limited the promise of both.

Burning brightly, burning quickly - Gilead's hep C franchise
2013 2014 2015e 2016e 2017e 2018e 2019e 2020e
Sovaldi + Harvoni worldwide sales ($m) 139 11,761 14,823 15,352 14,682 13,776 13,061 12,476

Gilead has several other hep C projects in the pipeline, but analysts are not ascribing any sales to them at this point, perhaps because there is some recognition that the pig will have completed its journey through the python by the time those can be launched.

Thus the efforts to return cash to shareholders is a recognition that growth is not a permanent state as Gilead stands today. The coming years could very well see a transition of Gilead back to a pipeline and M&A story again, and that brings greater uncertainty.

To contact the writer of this story email Jonathan Gardner in London at [email protected] or follow @JonEPVantage on Twitter

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