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Biotech investors bail out after Gilead’s drug pricing fight

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(Bloomberg) — The biotechnology sector is having its worst day since April as investors fear health insurers and the pharmacy benefits managers (PBMs) that manage patient’s drug benefits will put new pressure on how much the industry can charge for breakthrough treatments.

The selloff, prompted by Express Scripts Holding Co.’s announcement yesterday that it would block its U.S. patients from getting Gilead Sciences Inc.’s $1,100-a-pill hepatitis C medicine, sent the Nasdaq Biotechnology Index down as much as 5.4 percent, the biggest intraday drop since April.

See also: Hepatitis C pill fight: What will CVS do?

Gilead’s drug, which goes by the brand name Harvoni, is the first of a new generation of hepatitis C medicines to offer high cure rates and fewer side effects for 3.2 million Americans with the liver virus. It also costs $94,500 for a 12-week course and is projected to be among the best-selling drugs of all time. Since Express Scripts said it would block the pill, Foster City, Calif.-based Gilead’s stock has fallen 18 percent.

Gilead shares “have been a gateway stock for a lot of generalist investors moving into biotech,” said Geoffrey Porges, an analyst at Sanford C. Bernstein & Co. “If Gilead is causing pain, it’s pain felt across the biotech sector.”

Before yesterday, the Nasdaq Biotechnology Index had climbed 40 percent this year. Investors have poured $7.26 billion into health-care exchange traded funds in 2014, second only behind energy funds, according to data compiled by Bloomberg.

Over the same period, the health insurers and PBMs who pay for biotechnology drugs have complained that the prices they’re being charged are unsustainable. Express Scripts, based in St. Louis, has waged a campaign against Gilead, culminating with the decision to block Harvoni in favor of a cheaper AbbVie Inc. drug approved this month.

Questioning growth

“The distributors and pharmacy benefit managers are finally putting pressure on these biopharma names,” said James Abate, who manages $1 billion as the chief investment officer of Centre Asset Management in New York. “It calls into question the future growth rate of pricing capabilities in these companies.” The fund owns Gilead shares, according to data compiled by Bloomberg.

Today’s selloff mimics investors’ reaction in March, following concerns raised by Rep. Henry Waxman, a California Democrat, about the price of Gilead’s related hepatitis C drug, called Sovaldi. The Nasdaq index plunged more than 20 percent then.

The rush to sell is exacerbated by the timing of the announcement, said Porges, with fund managers thinking after such good year in biotech, “Shouldn’t I sell my winners and position myself better for the next year?”


Abate thinks the selloff is an overreaction and said he still likes the major biotech companies, including Gilead.

While pharmacy benefit managers may be able to exert pricing pressure in areas where there are many competing drugs, “the sustainability of branded drug pricing is still relatively strong if you have genuine uniqueness,” Abate said by telephone.

See also: Medicare patient chooses between mortgage and acromegaly drugs.

Drugs for rare diseases and that have few or no competitors are likely to be protected in terms of pricing, said Porges. “More and more biotech companies have been focused on that type of opportunity,” he said.

Mark Schoenebaum, an analyst with Evercore-ISI, also urged investors not to be spooked.

“Even if we believe that Gilead will have no access to the lives covered by” AbbVie’s agreement with Express Scripts, “the net impact is likely to be 5 percent or less of the company’s U.S. revenue,” he said in a conference call today.

–With assistance from Sonja Elmquist in New York.


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