Tuesday, July 12, 2016

Gilead's Strategy for Epclusa

Summary

The FDA approved Gilead's new HCV drug, Epclusa, last week.

While approval was widely expected, shares advanced 4% on the news.

The price Gilead set for Epclusa reveals its strategy.

The FDA approved Gilead's (NASDAQ:GILD) new hepatitis C drug, Epclusa, last week. The drug, a combination of sofosbuvir and velpatasvir, is intended to treat HCV patients with or without advanced liver disease. The FDA approval itself was not a surprise: test results showed that 95-99 percent of the 1,558 patients who received Epclusa in clinical trials had no virus detected in the blood 12 weeks after treatment. But even though approval was expected, GILD's stock advanced on the news, which suggests that the market was waiting to see how GILD would price the drug, and what it would imply about the company's strategy.

Gilead depends on its hepatitis-C drugs for most of its revenue. The company has carved out a dominant position in the HCV market (approximately 90% share) thanks to its two blockbuster drugs Harvoni (43% of Gilead's sales in 2015) and Sovaldi (16% of revenues). These drugs are geared for patients of different genotypes. Whereas Harvoni is mainly used with genotype 1 and 4 patients, Sovaldi is primarily used to treat non-genotype 1 patients.

Because the vast majority of the HCV population is of the type-1 variety, Harvoni claims a much bigger share of the HCV market. The challenge with Epclusa, which treats genotypes 1-6, was figuring out how to market it in such a way that it didn't take share from Gilead's biggest moneymaker, Harvoni. GILD is pricing Epclusa at $74,500, compared to the 94,500 it charged for Harvoni when it was approved

Price has become a bigger issue due to increased competition from cheaper alternatives, which has caused the cost of Harvoni to drop. In the type-1 segment, Harvoni now competes with AbbVie's (NYSE:ABBV) Viekira Pak drugs (priced at approximately $85,000 when it was approved), and Merck's (NYSE:MRK) Zepatir treatment ($54,600). In keeping the price of Epclusa relatively high, management is attempting to keep Epclusa out of the type-1 market where it would likely take share from Harvoni.

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