Announcing its first dividend, annual revenue that doubled the prior year's performance and a $15 billion buyback plan wasn't enough to buoy Gilead Sciences' shares when it dropped a bomb during its fourth-quarter earnings conference call: Discounts on the company's hepatitis C drugs this year will be 46 percent, way more than investors and analysts expected.
"That really escalated quickly," Brian Skorney, an analyst with Robert W. Baird, wrote in a note to clients Wednesday. The discount "is meaningfully worse than expectations" in the 25 to 30 percent range, and as a result, Skorney lowered his estimate for Gilead's hepatitis C revenue by 20 percent to $12.9 billion.
It's a price war that's been brewing for some time, and flared even more when competitor AbbVie signed an exclusive deal for placement on Express Scripts' largest formulary plan—the pharmacy benefits manager's plan that includes the most patients—at a significant discount in December. Weeks later, Gilead struck back, signing an exclusive deal with CVS.
Yet the magnitude of the discounts surprised the market: A day after the conference call, Gilead's stock was down almost 9 percent Wednesday morning—even after its hepatitis C drugs Sovaldi and Harvoni drew a combined $3.8 billion in revenue in the fourth quarter, topping analysts' estimates. Shares of other hepatitis C drug makers AbbVie, Achillion and Merck, which is expected to introduce its regimen next year, also sank.
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Gilead said part of its adjustment reflects a shift toward more patients who are covered by Medicaid and the Veterans Administration receiving the drugs at rebates of more than 50 percent.
"The higher levels of rebates are tied directly to opening up access and streamlining the process of starting patients on therapy," Paul Carter, Gilead's executive vice president of commercial operations, said on the company's earnings call.
With the new arrangements, Gilead said it has the capacity to treat at least 250,000 patients in the U.S. this year, though its financial forecast assumes fewer. Skorney estimates the discounts could lead to Harvoni priced at about $45,000 per patient on average this year compared with its list price of $94,500 for 12 weeks of treatment or $63,000 for eight weeks. The discounts could drive Sovaldi down to $54,000, from $84,000 for 12 weeks of treatment (or $1,000 a day).