This commentary originally appeared on Real Money Pro at 11:00 on Oct. 23. Click here to learn about this dynamic market information service for active traders.
Late yesterday news broke that the Food and Drug Administration is warning that treatment with AbbVie's (ABBV) hepatitis C drug combination, Viekira Pak, can cause serious liver injury, principally in patients with advanced liver disease. Evidently, there have been numerous cases of liver decompensation and liver failure in patients with cirrhosis who were taking the medications. Some of the cases resulted in liver transplantation, or death. It should be noted that most of these patients that were receiving Viekira Pak already had advanced cirrhosis before beginning treatment.
Obviously there were myriad winners and losers from this event. Let's start with the obvious loser, AbbVie. The stock finished down about 10% yesterday, after dropping nearly 15% when this news first broke. I added some shares to my core holdings near the nadir of that decline, Thursday. Yes, this was disappointing news for the drug giant.
However, Viekira's rollout was already much weaker than initially expected. The run rate, as of the last quarter, was approximately $1.5 billion on an annual basis. The product is not being recalled or removed, but this warning will affect sales, obviously. Let's say this news causes sales to be slashed by two thirds -- or by $1 billion a year. This represents less than 4% of next year's projected sales for AbbVie. With the sell-off -- and even reducing next year earnings projections by around 5%, the stock goes for 10x forward earnings and yields over 3.5%.
In addition, the FDA definitely has egg on its face for rushing to approve this multiple combination drug pack that obviously had side effects that were not uncovered during trials. I have also heard some commentary that Merck's(MRK) upcoming entries in this space in 2016 might have similar issues, or at least come under additional scrutiny.
Express Scripts (ESRX) -- and certain politicians -- are not looking too good at the moment, either. Both used AbbVie's entry into the hep C space as a cudgel in the pricing war against Gilead Sciences (GILD), which is dominating the market with its blockbuster drugs, Sovaldi and Harvoni. Gilead's products have been remarkable for their lack of side effects and their cure rates. Sometimes you really get what you pay for, which everyone should remember when next we hear another snippet about drug price "gouging." There are obviously some "bad actors" in this space, but Gilead is not one of them, and the average price for its hepatitis C compounds continues to fall, as they are rolled out more widely.
Finally, Gilead is the hands-down winner in this fiasco. The stock has been kept unfairly cheap -- primarily due to worries about increasing competition in the hep C market. The stock was up about 6% yesterday. But it is still very cheap -- at about 9x this year's earnings. I would not be surprised if the stock gets a rash of analyst upgrades and price target upward revisions in the weeks ahead, especially after quarterly numbers come out next week. I added a few shares on Thursday's breaking news on top of an already substantial stake in this biotech juggernaut. It remains the biggest position in my portfolio.