Miracle Drug May Be Ailing Gilead

 | Apr 23, 2014 | 3:48 PM EDT
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Is it possible for a drug to be too good? That's what could be "ailing" Gilead (GILD). After the company reported $4.9 billion in sales last night  (a 104% increase, year-over-year), you would expect its shares would be trading much higher today.

Gilead has a miracle drug called Sovaldi that saves the lives of people who have hepatitis C. It's a remarkably potent drug that cures people after a 12-week regimen.

There are three problems with this miracle achievement though. First, it costs $84,000 and the insurers are balking even though the consequences of not treating hepatitis C are far worse not just for the patient, of course, but for the insurers themselves.

Second, Wall Street likes maintenance drugs that you take for the rest of your life, like the anti-cholesterol drugs or the multiple sclerosis drugs (including Biogen Idec's (BIIB), although that stock is down today), which are annuity streams. Once you are cured of hepatitis C you are cured -- and you have to believe that, even though only half of the doctors who can prescribe it, according to Gilead, have already. So, there is a real (albeit high quality) finite problem.

Third, there is competition coming from both AbbVie (ABBV) and Merck (MRK). Normally, I would say that Gilead's got first-move advantage and you don't need to worry, the other guys are making real progress and if their products are as good as Sovaldi, believe me, that $84,000 price tag won't stay up there.

All that said, I really like Gilead. It has more than Sovaldi going for it. It's got a terrific balance sheet and can buy back stock with abandon. But these outlined woes, the idea that there is big inventory in the system and this market's newfound hatred of biotech will keep a lid on this stock for some time.

After the great start for this hepatitis C cure, this situation is frustrating. But sometimes companies develop products that are too amazing for their own good and the good of their shareholders -- even though they are certainly fabulous for the customers.

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