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Bigger drug discounts put question mark over Gilead’s stellar run

February 4, 2015, 9:52 AM UTC
Inside of a Gilead Sciences Lab
Darryl Kato, research scientist for Gilead Sciences Inc., works on the synthesis of a potential hepatitis C virus drug candidate at the company's lab in Foster City, California, U.S., on Wednesday, Feb. 8, 2012. Gilead acquired Pharmasset Inc. last month for its experimental hepatitis C treatments as it aims to compete with other drugmakers like Bristol-Myers Squibb Co. and Merck & Co. to develop a new class of oral cures for hepatitis C to replace older drugs that require injections. Photographer: David Paul Morris/Bloomberg via Getty Images
Photograph by David Paul Morris — Bloomberg via Getty Images

Gilead Sciences Inc. (GILD) said Tuesday it’s offering steeper-than-expected discounts on its hepatitis C drugs to health insurers and other group payers who had complained about the price.

Gilead executives disclosed the discounts on a conference call after the company said strong sales of the drugs, Harvoni and Sovaldi, helped boost net profit more than four-fold in the latest quarter, beating Wall Street forecasts.

The drugmaker’s shares slid more than 5% in after-hours trading on what is the latest twist in a struggle typical of the increasingly bitter fight between healthcare providers and pharma companies to keep a lid on soaring costs. The shares are still up more than 120% over the last two year, however.

Topping out or taking a breather? Gilead's shares have lost momentum since Abbvie's competing drug hit the market.
Topping out or taking a breather? Gilead’s shares have lost momentum since Abbvie’s competing drug hit the market.

 

In late 2013, Gilead prompted howls of protests about prescription drug prices when it launched Sovaldi at a price of $1,000 a pill. But since AbbVie Inc (ABBV) launched a rival hepatitis C treatment late last year, both companies have fought for market share by offering rebates to group payers.

The executives said the “gross to net” adjustment for the company’s hepatitis C drug sales will average 46% in 2015, up sharply from 22% at the end of 2014.

Many Wall Street analysts had projected hepatitis C sales based on discounts of 25%-30%.

Foster City, California-based Gilead also said it would start paying a quarterly dividend (starting at 43c a share in the second quarter) and devote $15 billion more to a share buyback plan. It still has $3 billion outstanding on its current buyback plan.

The dividend and expanded share buyback “reflect the confidence we have in our business and our robust balance sheet,” said Chief Financial Officer Robin Washington. “This doesn’t prevent us in any way from investing in the pipeline, or M&A.”

Chief Operating Officer John Milligan said Gilead “will continue taking steps necessary” to provide wide access to its hepatitis C drugs, which have been shown to cure nearly all treated patients.

Sales of Sovaldi totaled $1.73 billion for the quarter, while sales of follow-on drug Harvoni totaled $2.11 billion. Analysts, on average, had forecast Sovaldi sales of $2.05 billion and Harvoni sales of $1.58 billion, according to Deutsche Bank.

Gilead estimated that so far, 141,000 Americans have been started on one of its hepatitis C products, and it expects 250,000 to be treated this year. As many as 3.2 million people in the U.S. are estimated to be infected with the hepatitis C virus, which can lead to severe liver disease.

For full year 2015, Gilead projected total product sales of $26 billion to $27 billion, short of the average Wall Street estimate of $28.6 billion.

“The guidance is conservative,” said RBC Capital Markets analyst Michael Yee. “They probably don’t want to be parading around huge sales for the course of the year as everyone is sensitive to this and everyone is watching them.”

Gilead reported quarterly net income of $3.49 billion, or $2.18 a share, up from $791 million, or 47c a share, a year earlier. Excluding one-time items, it earned $2.43 a share, outstripping the average Wall Street estimate of $2.22.