Although Gilead Sciences Inc. (GILD), one of the leading biotech companies in the U.S., recovered 2.1% on Wednesday, overall the stock has plunged approximately 15.8% after pharmacy benefit manager Express Scripts (ESRX) entered into an agreement with AbbVie Inc. (ABBV).
Express Scripts-AbbVie Deal
Express Scripts announced an update to its National Preferred Formulary, providing access to AbbVie's Viekira Pak. (Read more: Express Scripts Picks AbbVie's Hepatitis C Drug) Last week, Viekira Pak, an all-oral, interferon-free treatment, with or without ribavirin gained FDA approval for the treatment of patients with chronic genotype 1 hepatitis C virus (HCV) infection including those with compensated cirrhosis. (Read more: AbbVie's All-Oral, Interferon-Free HCV Treatment Approved)
Express Scripts' independent Pharmacy & Therapeutics Committee has determined Viekira Pak to be at least clinically equivalent to Gilead’s expensive HCV treatments, Sovaldi and Harvoni.
Subsequently, Express Scripts has added the lower priced Viekira Pak to its formulary, which will be the exclusive option for genotype 1 HCV patients from Jan 1, 2015. Sovaldi, Harvoni and Johnson & Johnson’s (JNJ) HCV drug Olysio will be removed from its National Preferred Formulary. These products will be available only to patients who are already in these treatment regimens.
How Does it Affect Gilead and Other Biotech Companies?
Gilead’s blockbuster drug, Sovaldi has generated almost $8.6 billion in the first nine months of 2014 and its new drug Harvoni (approved in Oct 2014) was also received well. However, we are concerned about the future of these products as a result of the Express Scripts-AbbVie deal.
Presently, the HCV market is quite lucrative. As per Express Scripts press release, approximately 2.25 million (75% of the approximately 3 million) people in the U.S. suffer from the genotype 1 HCV infection. All patients covered by the Express Scripts’ National Preferred Formulary will now have access to Viekira Pak.
Express Scripts’ choosing lower-priced Viekira Pak over other expensive HCV drugs, has triggered concerns about pricing pressure on other high-priced biotech drugs. Shares of several biotech companies including Biogen Idec Inc. (BIIB) and Amgen Inc. (AMGN) have declined 5.5% and 5.6% respectively, since the Express Scripts deal. NASDAQ Biotechnology index also declined 5.4%.
Bottom Line
Despite the recent weakness in the biotech sector, it is worth noting a trend reversal in the last trading session. Investing in this sector will be rewarding for those who are willing to be patient.
We remind investors that earlier this year a similar sell-off was witnessed with the lawmakers issuing a letter to Gilead questioning the pricing of Sovaldi. This had led to widespread speculation about potential pricing pressure on biotech companies.
Despite challenges like increasing competition and potential pricing pressure, we believe that industry fundamentals remain intact. Nevertheless, biotech companies are on the lookout for better strategies to emerge as winners.
Investors looking to invest in the biotech sector may consider Amgen carrying a Zacks Rank #1 (Strong Buy).
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