Gilead Stock Forecast: Can Pricing Pressure and Competition Stop Gilead’s 5-year Bull Run?

reuben 2Reuben Bor is a Financial Analyst Intern at I Know First

Gilead Stock Forecast

  • Gilead Sciences has returned over 330% to shareholders in the past 5 years
  • Merck has released a rival Hepatitis C drug that is substantially cheaper than Gilead’s Harvoni
  • Massachusetts’s Attorney General has threatened the company with legal action concerning the company’s pricing policies
  • Gilead Stock 2016 Outlook

Gilead Stock Forecast

History:

Gilead Sciences, headquartered in Foster City, California is a research-based biopharmaceutical company that was founded in 1987 by Dr. Michael Riordan, a Johns Hopkins trained physician who wanted to create a company that focused on developing therapies for antiviral medications. In 1991, Gilead licensed the compounds used in tenofovir, which would later become known as Viread, one of the world’s most largely prescribed medications used to combat AIDS. In 1992, Gilead was listed on the Nasdaq, and in 2003 the company announced its first year of profitability. Under the supervision of R&D head turned CEO, John C. Martin, the company really began to take off. In 2006, Gilead entered the cardiovascular and respiratory therapy arenas, with the FDA approval of Ambrisentan and continued to expand in the antiviral space with the FDA approval of their HIV blockbuster, Atripla. By 2009, Gilead was awarded by Fortune magazine for being considered a “fastest growing company.” In 2011, Gilead, took a huge a risk in acquiring the Princeton, New Jersey based Pharmasset for $11 billion, a company that did not have any sales, and only had 3 clinical phase product candidates. This acquisition ultimately leads to Gilead’s introduction of Sovaldi, their miracle cure for Hepatitis-C, into the market. In 2013, Forbes ranked Gilead the number 4 pharmaceutical company with operations in more than 30 countries across six continents, and it is one of the largest biotechnology companies with a current market capitalization of  over $127 billion.

 

Sovaldi and Harvoni:

In less than 30 years, Gilead has become a giant in the pharmaceutical space, where it dominates the markets for both HIV and Hepatitis-C (HCV), due mainly to the fact that most of their treatments are formulated in a single tablet, that only need to be taken once daily. Therefore, they are not only the most effective treatments, they are also the most convenient, a feature that allows for very high patient compliance. In the HCV space, Gilead’s major drugs include Sovaldi, which was approved by the FDA in 2013 and Harvoni, which was approved in 2014.  These drugs are of particular importance because they were the first full treatments for Hepatitis-C, a disease that affects 3 million people in the US, and over 200 million worldwide. Since Sovaldi’s introduction in 2013, it has been prescribed to over 170,000 Chronic HCV patients. Together, Solvaldi and Harvoni have generated over $12 billion in sales in 2014 and close to $20 billion in 2015.

Gilead Stock Forecast

(Source: Bloomberg)

Gilead’s portfolios of HIV medications, Atripla, Stribild, and Complera, which actually remove the virus from the bloodstream, are valued at over $10 billion. Gilead’s once daily, single tablet regimen HIV drugs are prescribed to more than 70% of newly diagnosed HIV patients in the United States. This past week, on March 1st the FDA approved Gilead’s newest HIV drug, Odefsey, which contains tenofovir alafenamide a tenofovir prodrug that is shown to have the same efficacy as tenofivir at one-tenth the dose.

With such a groundbreaking portfolio of antiviral drugs, and with aspirations to expand their pipeline beyond antivirals, where the company’s other products category generated $1.9 billion in sales in 2015, an increase of $200 million from 2014. Gilead has already generated massive revenues with their HCV drugs, yet, the company thinks that it has only served about 8-9% of an estimated 6.6 million HCV patients in the U.S and five major European countries, which leads many people to believe that there is room for growth in the antiviral space, and many analysts are very bullish on the biotech that has a remarkable record of performance. Gilead has almost quadrupled its revenue from $8.3 billion in 2011 to $32.6 billion in 2015, and the stock has returned 330% to shareholders in that same five-year period, and with $26.2 billion in cash and cash equivalents reported on the company’s balance sheet, Gilead seems to be in a very secure position. Furthermore, in the beginning of February, Gilead announced that it would be raising its dividend to 10%, making the company look like a very attractive buy. All of these factors in mind, there are still some major considerations that need to be made when looking into the future of the company, and those are intense competition and the social, political and legal pressures that the company is facing in response to the pricing of their HCV cures, where a 12 week course of Harvoni treatment costs $94,500.

 Gilead Stock Forecast

(Source: Gilead Sciences) 

Despite Intense Competition, Gilead’s HCV franchise still holds 95% of the market share.

AbbVie (NYSE: ABBV) first challenged Gilead’s HCV franchise, with the FDA approval of Viekira Pak in 2014, which priced at around $83,000, is not necessarily a bargain compared to Harvoni. Viekira Pak is believed to have more unwanted side effects and is therefore not a better alternative to Gilead’s Harvoni. AbbVie’s Hep-C had sales of $1.1 billion in the first 9 months of 2014, taking little market share from Gilead who did sales of $14.2 billion with their HCV drugs during the same 9 months. However, at the end of January, Merck (NYSE: MRK) has now initiated a price war for the American hepatitis C market with the FDA approval of Zepatier, which will be priced at $54,600 for a 12-week regimen, an approximate $35,000 discount to Harvoni. Could Merck’s Zepatier, position itself as the cost leader in the HCV space, and compete with the already proven to be effective Sovaldi and Harvoni Franchise? Tim Anderson, a Bernstein analyst told the Wall Street Journal that Merck “can capture an 11% share of the hepatitis C market in 2017 with its new product, which would amount to about $2.2 billion sales.” If Mr. Anderson is correct, that means that it will take a year for Merck to do 14% what Gilead has already done in the first 9 months of 2015. However, in the United States the US Veteran Affairs Hospitals are among the largest single purchasers of Sovaldi and Harvoni, according to Gilead’s Q4 conference call, has budgeted $1.5 billion dollars for the next year. Doing a calculation based on the listed prices (which the VA, most likely does not pay), the government would be able to treat over 15 thousand veterans using Gilead’s Harvoni. If proven to be equally effective, and it seems likely that Zepatier could be a viable contender, the clinical studies showed that a 12 or 16 week regimen reduces the HCV virus to undetectable levels in more than 94% of patients. So, if Zepatier does not have considerable side effects, the VA’s same $1.5 billion budget would be able to treat over 27 thousand veterans affected by hepatitis C, or 80% more patients than they would with Harvoni. I believe that when it comes to these key decisions, it is quite possible that prescribers will be heavily inclined to consider Merck’s alternative. This is something that should be paid attention to when the VA begins to renegotiate their HCV budget. Merck believes that price constraints are a reason that many hepatitis patients still have not been treated, and has bet big on this approach. Citi analyst, Andrew Baum, explained in the Financial Times; “While Merck’s hepatitis C agent is clearly inferior to incumbent competitors, we expect the launch of Zepatier to further drive net price reductions for all market participants.” Three weeks into the launch of the new entrant, Gilead’s HCV franchise still holds 95% of the market share.

 

Legal action concerning the company’s pricing policies has fairly low probability of success

Gilead has experienced backlash with regards to their pricing strategy for Sovaldi and Harvoni as spending on prescription drugs increased by over 12% last year, and political figures are looking at drug companies in order to contain their spending. In December two senators from the Committee of Finance, Ron Wyden of Oregon and Chuck Grassley of Iowa released the conclusion of their 18-month investigation into the pricing practices of Sovaldi. The duo looked through over 20,000 internal company documents and had extensive interviews with company executives. This investigation brought a lot of negative attention to Gilead as the senators concluded that their investigation “reveals a pricing and marketing strategy designed to maximize revenue with little concern for access or affordability.” Gilead believes that due to the pill’s effectiveness in curing about 9 out of 10 patients, the drug is fairly priced as it can prevent future costs associated with hepatitis C, such as liver transplants. Ultimately, the Senate is trying to push for price controls on prescription drugs, a prospect that has frightened many biotech investors.

Beyond the public shaming by the Senate, Massachusetts Attorney General, Maura Healy, has threatened the company with a lawsuit, claiming that Gilead’s pricing practices could be in violation of the state’s Lawson unfair trade practices. In Gilead’s 10-K the company addressed the legal action by explaining “In February 2016, the Massachusetts Attorney General’s office served us with a Civil Investigative Demand requesting that we produce documents related to our HCV products. It is possible that the results of the Senate Committee investigation and any actions taken by the Massachusetts Attorney General or other state governments could result in negative publicity or other negative actions that could harm our reputation, reduce demand for Harvoni, Sovaldi or other sofosbuvir containing products and/or reduce coverage of Harvoni, Sovaldi or other sofosbuvir containing products.” Law professor, Dean Hashimoto, told the Wall Street Journal, that a lawsuit challenging high drug prices is “unusual”.  Joshua Schimmer an analyst at Piper-Jaffray responded to the news of the lawsuit by saying in a note “While there is no perfect precedent for such a case, the probability of success seems fairly low given the likelihood that patent law trumps Chapter 93A regulations. Nonetheless, it does highlight challenges individual states are having affording healthcare costs for its Medicaid population.”

 

Forecast:

I Know First supplies financial services, mainly through stock forecasts based on a predictive algorithm. The algorithm incorporates a 15-year database and utilizes it to predict the flow of money across 2000 markets. The self-learning algorithm uses artificial intelligence, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.

The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.

On March 2nd, I Know first had a very bullish signal for Gilead in the Biotech Stock forecast for the one-month and the three-month periods, however, for the year the signal declined.

 Gilead Stock Forecast

I Know First has previously correcly predicted the GILD stock movement in this forecast from the September 27th, 2014 I Know First Review.  GILD with a bullish signal of 89.57 and predictability of 0.3 managed to return 72.58% in a Year.

Gilead Stock Forecast