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Pricing wars heat up over hepatitis C drugs

A researcher works on a hepatitis C virus drug at Gilead Sciences lab in Foster City, Calif.
David Paul Morris | Bloomberg | Getty Images
A researcher works on a hepatitis C virus drug at Gilead Sciences lab in Foster City, Calif.

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).

For Express Scripts, which has been waging a pricing war since Sovaldi was approved in December 2013, it's vindication.

"The real lesson here is if Gilead had worked with us throughout last year, they would probably be in a much different spot than they are today," Dr. Steve Miller, Express Scripts' chief medical officer, said in a telephone interview Wednesday. "We would be spreading out those savings across a longer period of time. They're having to play catch-up because they didn't heed our advice last year."

Express Scripts said last week that the U.S. health-care system will save more than $4 billion this year on hepatitis C drugs because of "the industry-wide ripple effect of our decision."

"That's probably going to turn out to be on the light side," Miller said. "These discounts are shocking everyone because, historically, you never saw this before when there were just two competitors in the marketplace. It's not that we don't have other branded drugs discounted this much, but to have it this early in the history of the drug is unusual."

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The message is resonating across the industry, even as drugmakers are clearly rankled by the moves.

"There has been a substantial amount of public discussion about the payer landscape," Gilead's Carter said Tuesday. "We believe treatment decisions are best made by doctors and their patients."

The sentiment echoed comments from Regeneron CEO Len Schleifer, who said in a Jan. 20 interview on CNBC that "Express Scripts wants to sort of practice medicine, and I'm not really in favor of that."

"They want to make exclusive choices and say, 'Well, if you give us a huge discount we'll take your drug and we won't take the other drug,'" Schleifer said. "Now, that is good for patient access because prices come down, but really what's best for patient access is choice, and we think doctors and patients should be making that choice."

Regeneron is developing a drug for cholesterol in a class known as PCSK9 inhibitors; its drug has an expected decision date at the Food and Drug Administration in July, a month before a competing drug from Amgen. Express Scripts has called out that class as one it will likely focus on next.

"What we'd like to do is come up with the price that represents the value of the drug to the patient, to the health-care system, so that the pricing doesn't become the enemy," Schleifer said. "It's the disease that is the enemy, so that's what we want to focus our efforts on. Of course we have to come up with a price that's fair, and that's based on the value we deliver."

Analysts say the dynamics of the hepatitis C market may differ from other areas, as the therapies are curative and treatment isn't always immediately necessary given the disease's relatively slow-moving nature.

"We believe these factors all give payers an unusually high degree of leverage to seek the best possible deal [especially with multiple players on the market] and to adjust formularies without disrupting existing patient care, as such a strategy would for chronic therapies," Brian Abrahams, an analyst with Wells Fargo, wrote in a research note Wednesday.

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For Express Scripts, the discounts mark another reason for the industry to take notice.

"This is going to be another tangible example for the pharmaceutical companies," Miller said. "This is why we believe so many are having discussions with us prelaunch versus what we used to experience."

Drugmakers are getting in touch as early as when they're in the mid-stages of development, Miller said, "seeking to understand what kind of data we're going to want."

The goal, he said, "is to not actually have to limit the formulary. We'd like to see companies come out at lower prices at the offset so it's affordable for our membership."

In addition to the PCSK9 class of cholesterol drugs, Miller cited products already on the market in diabetes and asthma, as well as cancer drugs known as checkpoint inhibitors—two of which were approved last year, from Merck and Bristol-Myers Squibb—as areas it will focus on to rein in prices.

"We see a lot of opportunity in the cancer area in the near future," Miller said.

Despite aiming for the lowest price at the offset, "that doesn't mean we're not always going to push as hard as we can to get the most discounts we can achieve," he said.