The biotech sector experienced a big shock on Monday, December 22, just one trading day after new record intraday and closing highs had been reached by the four most-heavily-traded biotech ETFs: the iShares Nasdaq Biotechnology Index ETF (IBB), the SPDR S&P Biotech Index ETF (XBI), the Market Vectors Biotech ETF (BBH) and the First Trust NYSEARCA Biotechnology Index ETF (FBT).
The epicenter of Monday's biotech-quake was Gilead Sciences (GILD). On October 10, the FDA approved Gilead's newest hepatitis C drug, Harvoni, a once-per-day tablet, which has been found to cure 90 percent of Hepatitis C patients within eight weeks. Harvoni does not require the use of ribavirin and interferon. Gilead's predecessor hepatitis C drug, Sovaldi, would be used for 12 weeks at a cost of $84,000 per patient. Because Harvoni is used for only eight weeks, the cost per patient is $63,000.
The cost savings which Harvoni brought were obviously not enough to satisfy Express Scripts (ESRX), which manages covered prescriptions on behalf of insurance carriers for approximately 85 million Americans. On December 22, Express Scripts cut a deal with AbbVie (ABBV) to sell AbbVie's Viekira Pak as the only hepatitis C treatment to be sold by Express Scripts. The amount of the discount given by AbbVie for its product was not disclosed.
The news sent Gilead's share price plunging 14.34 percent to $92.90. On Tuesday, December 23, GILD shares fell another 3.71 percent to $89.45. Capitalization-weighted biotech ETFs which had more significant exposure to GILD, made more-significant declines than the equal-weight biotech ETFs.
The aftershocks which reverberated across the biotech sector concerned the risk that ESRX might start using the same approach to reduce the prices of other drugs. Worse yet, there were fears that insurance companies and other pharmacy benefit managers might begin a similar game of “hardball”, which could ultimately cause drug developers to become less lucrative. If it begins to appear as though those quarterly earnings reports from drug developers might no longer appear so impressive, investors could get scared away from the biotech sector.
