Gilead stock gained in yesterday’s trade despite overall market weakness

Gilead Sciences, Inc. (NASDAQ:GILD) gained 1.4% in Monday’s trade after a particularly bullish research report was released by UBS. The broader iShares NASDAQ Biotechnology Index (IBB) dropped almost 0.2% during the same time. Analyst Matthew Roden mentioned Gilead among its best ideas in biotech after “all the dislocation” in the industry.
The IBB index has plunged 23% since the start of this year, compared to a 1% decline of the S&P 500 Index. The index started its downward trend late last year when presidential campaigns restarted debate over drug price inflation in US. Since then, federal and congressional investigations into unexplained drug price hikes and fear of a pricing reform sent drug stocks spiraling further down. As a consequence, the volatility has changed valuations of most major biotechs. Gilead has lost about 11.5% of its value year-to-date (YTD).

UBS analyst Matthew Roden said: “Over the past 6 months, we find that Gilead Sciences, Celgene (CELG), Biogen (BIIB), and Regeneron Pharmaceuticals have gotten cheaper relative to peers on consensus 2017 estimates, while Vertex Pharmaceuticals, Alexion Pharmaceuticals (ALXN), and Amgen (AMGN) have gotten more expensive…”
He further said that Gilead currently “screens as the overall most attractive among large caps,” given its valuation, the fact that UBS’ estimates for the stock are most above consensus and that it is the only stock trading below the research firm’s “no-pipeline” net present value (NPV) calculations. The firm rates the stock a Buy at a price target of $130 apiece, representing an upside of nearly 40% over Monday’s close at $90.46. At the same time, the average 12-month price target on the stock stands at $117.33, a premium of almost 30% over last close. Of the 26 analysts covering Gilead stock, 18 rate the stock a Buy while eight recommend a Hold.
“In large cap, we think this analysis suggests Gilead has the best overall risk-reward skew with 48% upside to our base case and 80% upside if the pipeline or acquired product generates $5bn in revenues in 10 years,” the analyst said. Mr. Roden also estimates higher-than-expected hepatitis C drug sale volumes for the biotech giant over the years, stable pricing but a reduced market share. Gilead is best-known for its mega-blockbuster hepatitis C franchise, consisting of two revolutionary drugs, Sovaldi and Harvoni, which provide an effective cure for debilitating liver diseases in as little as eight weeks, with the least amount of side effects. The two drugs raked in over $19 billion in combined sales last year. However, Gilead expects a decline from this year forward as the franchise now has a reduced untreated patient group and competition from other larger market players. Consensus estimate, as compiled by Bloomberg, suggest 2016 sales of $17.2 billion, 2017 sales of $14.3 billion, 2018 sales of $11.4 billion and 2019 sales of $10.4 billion.
Earlier this year, Merck & Co. launched its own HCV option, Zepatier, with comparable efficacy and safety to Gilead’s drugs but is priced more than 30% less. Both Harvoni, costing $94,500 for a 12-week regimen, and Sovaldi, priced at $84,000 for a similar dosage, has attracted considerable criticism from payer groups. Last year, the nation’s biggest pharmacy benefit manager (PBM), Express Scripts Holding Company, dropped coverage of Harvoni in favor of AbbVie’s competing product, Viekira Pak, offered at large undisclosed discounts. The move forced Gilead to heavily discount its HCV drugs to win coverage from other PBMs.

Market experts believe Zepatier’s launch can trigger another pricing war in the HCV market. Merrill Lynch said in a prior research report that although they do not expect Merck’s drug to begin a pricing war in the market, it can result in a further 10% reduction in net pricing per patient (after rebates/discounts) this year, from almost 50% between 2014-2015. Bernstein analyst Tim Anderson estimates an 11% HCV market share for Zepatier in 2017, with sales amounting to $2.2 billion. The drug has already won access to Veteran Affairs National Formulary, which covers approximately 180,000 US veterans suffering from the disease. According to IMS Health data released for the week ending March 4, Gilead holds 94% of HCV market in the US — it should however be noted that IMS does not cover all scripts for the disease including those covered by Express Scripts.