Is the Price Still Right for Gilead Sciences?

Source: Gilead Sciences.

A recently filed lawsuit raises a big question for Gilead Sciences: Is the pricing for hepatitis C drugs Sovaldi and Harvoni set too high?

The Southeastern Pennsylvania Transportation Authority, or SEPTA, filed a lawsuit on Dec. 9 alleging that Gilead greatly overcharges for Sovaldi. This lawsuit questions the biotech's pricing of Sovaldi at $84,000 per standard 12-week treatment when the company charges much less for the drug to patients in other countries.

SEPTA's litigation did not specifically challenge Harvoni's pricing. However, the organization's filing referenced the even higher cost of the one-pill-per-day treatment from Gilead, which sells for $94,500 for a 12-week regimen.

An ounce of cure...Gilead's position on Sovaldi pricing has basically given a new twist to an old saying. Instead of "an ounce of prevention is worth a pound of cure," the biotech thinks an ounce of cure is worth a pound of ongoing treatment. Gilead maintains that a cure for hepatitis C justifies the high price tag because of the overall savings that will ultimately be obtained.

In April, Gilead's president and COO, John Milligan, stated that "the value of a cure, I tend to think, is underestimated in terms of the overall advantage that the health care system receives from it." This view appears to be supported to some degree.

Hepatitis C affects around 3.2 million Americans, according to the Centers for Disease Control. Hepatitis C is the leading cause for the more than 6,000 liver transplants done annually in the U.S. at a cost of over $280,000 each.Direct medical costs for the disease exceed $750 million each year, with indirect costs estimated between $4 billion and $5 billion.

If you used a rough total cost of $5 billion per year, hepatitis C could cost the U.S. $50 billion over the next decade. Sovaldi and Harvoni, though, demonstrated cure rates topping 90%. With the potential for many hep-C patients to be cured, the high price tags for these drugs could ultimately prove to yield significant savings over the long run.

Market rulesGilead also has the principles of economics on its side. The market rules of supply and demand still work in establishing the prices of products. Despite plenty of complaints, there hasn't been a shortage of willing buyers of Sovaldi and Harvoni at current pricing levels.

Last week brought a confirmation of sorts to Gilead's pricing strategy. AbbVie gained FDA approval for its hep-C drug,Viekira Pak. Payers hoping that AbbVie would price its drug significantly lower than Sovaldi were disappointed. Viekira Pak will sell for $83,319 for a standard 12-week treatment -- only nominally below Sovaldi's cost, and around 12% below Harvoni's price.

In explaining the pricing for its new drug, AbbVie spokesmanMorry Smulevitz stated that the price "reflects the value we believe Viekira Pak brings to hepatitis C patients and the health-care system." That sounds similar to what Gilead has been saying for months now.

The price is rightWhile payers could play Gilead and AbbVie against each other to win price concessions, both companies should still be able to command premium pricing for their hep-C drugs. Like it or not, for now, the price is right for Sovaldi and Harvoni -- and Viekira Pak.

The price is also right for Gilead, in my view. Strong growth prospects combined with a relatively low valuation make this stock attractive. AbbVie, for that matter, also looks like a good pick. However, Gilead's trailing-12-month earnings multiple and forward earnings multiple are both around 50% lower than those of AbbVie. As their hep-C franchises gain steam in 2015, both of these stocks should perform well.

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Keith Speights owns shares of Gilead Sciences. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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