Gilead Bucks Biotech Trend Thanks to Sovaldi News

Zacks Equity Research

Stocks in the biotech sector have been under pressure lately due to the selling off of major stocks in the sector. The biotech selloff, which started late last month, resurfaced late last week, with the NYSE ARCA Biotech Index (^BTK) dropping 6% on Apr 10. The Nasdaq suffered its largest decline in two and half years. Other major indices, including the Dow Jones Industrial Average (^DJI), too registered steep declines on that day, driven by the biotech selloff.

The negative momentum from the Thursday sell-off continued on Friday with major indices falling on the last day of the week. Big names in the biotech sector like Alexion Pharmaceuticals (ALXN) and Biogen Idec (BIIB)  dragged the biotech index down.

Amidst the second round of biotech selloff, Gilead Sciences (GILD) gained on Friday mainly due to a report in the Reuters that the Texas Health and Human Services Commission (:THHSC), which oversees Medicaid, has agreed to reconsider its initial strict recommendation to Medicaid pertaining to the company’s potential blockbuster hepatitis C virus (:HCV) treatment, Sovaldi.

The THHSC had initially recommended that the use of Sovaldi should be restricted to treat only the sickest HCV patients (with advanced stages of liver damage). The recommendation was due to the high price tag associated with Sovaldi in the U.S. ($84,000 for a 12-week treatment period). The THHSC agreed to reconsider its recommendation after consultations with outside advisors on the issue. Following the move by the THHSC, plans to initiate offering coverage from July have been put on hold.

The THHSC move caused Gilead to gain almost 4% in early trading on Apr 11. However, most of the gains were eaten away during the course of the day and each share of Gilead gained 0.84% at the end of the trading session to close at $66.03.

Sovaldi’s High Price Triggered Initial selloff

Sovaldi was approved in the U.S. in early December last year, as a combination therapy for treating patients suffering from HCV. While the drug’s benefits are unquestioned it is the pricing which has attracted criticism. Since HCV is more prevalent in the low-income strata of the society, Gilead’s pricing policy has attracted severe criticism from all quarters. The first major attack on the price of Sovaldi came from U.S. lawmakers with the Congress’ Committee on Energy and Commerce shooting off a letter last month to the company raising concerns about the pricing of the drug. It was this letter which triggered off the initial round of biotech selloff.

Pricing Concerns Overdone?

We believe that the furor surrounding Sovaldi’s pricing is overdone. The drug is off to a strong start with robust sales expected in the first quarter of 2014, its first full quarter in the market. Gilead will report first quarter results later this month. Sovaldi, with its high cure rates, a short treatment period and reduction/elimination of the need for interferon injections, has the potential to change the treatment paradigm in the HCV space. Strong first quarter sales could go a long way in justifying its high price tag.

Moreover, Gilead is looking to get its next HCV treatment, a fixed dose combination of ledipasvir and Sovaldi, approved in the U.S. The FDA will decide on the approval status of this cocktail treatment by Oct 10. The cocktail treatment is under review in the EU. Successful development and subsequent commercialization of the pipeline candidates would boost Gilead’s top line further.

Gilead carries a Zacks Rank # 3 (Hold).  Better-ranked stocks in the healthcare space include Amgen (AMGN) with a Zacks Rank #1 (Strong Buy).

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