How big are Gilead's hep C drug discounts? Enough to spook investors

Here's what a price war hath wrought. Gilead Sciences ($GILD) announced truly astounding 2014 results yesterday; sales more than doubled to $24.5 billion, thanks to its superstar hepatitis C pills Harvoni and Sovaldi. It's now a top 10 global drugmaker, sales-wise, bigger than Eli Lilly ($LLY), likely bigger than Bayer Healthcare, and certainly bigger than its current hep C rival AbbVie ($ABBV).

But investors balked, because Gilead's forecast for 2015 is comparatively modest, at $26 billion to $27 billion in product sales--some $2 billion short of analyst expectations.

Can you say discounting? The company said its hep C gross-to-net adjustments--the difference between upfront pricing and sales after rebates--will run 46%. More than double the 22% applied last year.

That answers the question of what payers mean by "substantial" and "significant" when they announced hep C formulary deals with Gilead (and, by extension, its only current rival, AbbVie). With payers promising tough negotiations on other expensive meds coming to market this year--including the PCSK9 cholesterol-fighters from Sanofi ($SNY) and Amgen ($AMGN)--those percentages could have many pharma execs reaching for their proton pump inhibitors.

Meanwhile, the pharmacy benefits manager Catamaran announced that it would team up with Gilead exclusively in hep C, adding itself to the list of payers who've sided with the California-based company against AbbVie. Aetna, UnitedHealth ($UNH), and CVS Health ($CVS) are among the more than half-dozen giving Sovaldi and Harvoni pride of place on their formularies, in exclusive or preferred deals. That's many millions of patients covered by insurance. Not all of them are infected with hep C, however; Gilead says it's capable of treating 250,000 hep C patients this year, but its sales estimates assume a somewhat lower number.

Gilead demurred when asked for an actual hepatitis C sales forecast, but Evercore/ISI Group analyst Mark Schoenebaum did some quick math to come up with an estimate. Using Gilead's numbers on sales adjustments and patients, Schoenebaum came up with an implied hep C forecast of about $10 billion to $10.5 billion, some way short of the consensus expectation of $11.5 billion. Schoenebaum and other analysts pointed out that Gilead tends to be conservative with its predictions, but that's rule of thumb, not yet reality.

AbbVie, second to the all-oral hep C market, is expecting some $3 billion from its Viekira Pak franchise. Obviously, it has been wheeling and dealing, too; that's how it scored the Express Scripts ($ESRX) formulary exclusive that kicked off the price war.

Express Scripts CMO Steve Miller

Last week, Express Scripts CMO Steve Miller estimated that U.S. payers and patients would save $4 billion thanks to the host of cost-cutting deals with Gilead and AbbVie. Gilead's numbers are on the opposite side of that equation.

There was a glimmer of good news for Gilead and AbbVie Wednesday, however. Merck ($MRK) said the FDA had pulled the "breakthrough" status on its hepatitis C treatment, the next competitor expected to hit the market. Other new treatments for genotype 1 strains are available now, the agency pointed out. Merck says the change won't interfere with its plan to file for approval the first half of this year, though it could slow down its marketing timeline, according to FierceBiotech. Even a brief delay could give Gilead and AbbVie a breather, however. Enough to boost Gilead's sales outlook for this year? That remains to be seen.

- get the Gilead release
- see the Reuters news

Special Report: Biopharma posts a chart-topping 41 new drug approvals in 2014 - Harvoni - Viekira Pak