On the same day Celgene was getting shellacked after cutting longterm revenue forecasts for the company, Gilead managed to keep the investor herd in a state of alarm with fresh evidence of the fast-deteriorating market for hep C drugs.
Given its dominant position in HIV, Gilead was able to boost revenue for that big chunk of its business. But its hep C business declined $1.1 billion for Q3 compared to the same period a year ago. What really sent the market overboard was a move to trim the projected top end of annual sales while indicating that Q4 could be very painful, reflecting price competition in the field.
Both companies are blindsiding the investment community after being unable to predict the near-term impact of rival pricing. For Gilead it’s in hep C, for Celgene it’s Otezla. What has been a reliable and confident march upwards to an often uncertain date with generic competition is beginning to look like a disruptive era of far more aggressive price competition, which will have a variety of effects on biopharma management as they work in a more constrained environment.
What happens to biopharma if Celgene’s executive crew starts to feel that they have to use more money for dividends and less for deals?
For stocks, the immediate effect of a sudden loss of faith was severe. Celgene’s shares $CELG ended down 16.4% for the day. Gilead, looking to rev up its new CAR-T business, saw shares $GILD slide more than 4% in pre-market trading. And it could get a lot worse before it gets better. Much of the market is translating that startling, unexpected turn of affairs into an industry-wide problem that could bring down the whole sector.
For some of the analysts, that underlying weakness was clear cause for alarm.
Baird’s Brian Skorney:
Even at the high end (of projections for Gilead), this calls for only $1.36B in worldwide HCV sales in Q4 (compared to $2.2 billion in Q3), an almost 40% sequential decline, and a run rate of only $5.0B-$6.0B into 2018. Consensus is currently modeling $7.9B in 2018 HCV sales. What we think is more concerning than just market share erosion is commentary on the call around net pricing, which management indicated is now stabilizing for all therapies around gt. 1 eight-week pricing. Heading into contracting for 2018, we aren’t encouraged by the rhetoric here.
I see a wholesale reset of 2018 and 2019 expectations based on today’s (Gilead) results. My new EPS estimates are 12-22% below published consensus for next couple of years. The stock may likely go through a period of cooling off while Street processes the numbers.
Keep in mind that while Gilead has been managing a fast-shrinking market in hep C, it still gets high marks for overall performance. Celgene has been a darling of investors for years. But reputations can turn on a dime these days.
Leerink’s Geoffrey Porges says that in one week we’ve seen Gilead and Celgene — two major league operators — unable to reliably forecast revenue 12 months out, “let alone conveying any confidence about the outlook 4 or 5 years into the future.”
Wall Street hates uncertainty of any kind, and biopharma just delivered a double dose of nasty surprises.
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