Gilead: Fear, Competition, & International Intrigue

Competition breeds improvement. 

A monopoly is the only model for successful and happy companies. 

The latter is the theme of Peter Thiel’s new book Zero to One: Notes on Startups, or How to Build the Future, highlighted in a new profile by Fortune on the billionaire pioneer and, yes, philanthropist. The former statement is one ingrained within us since grade school; whether conscious of this or not, competition is synonymous with capitalism. Or is it. Thiel, a contrarian by any stretch of the imagination- the man is a libertarian, gay Christian- expels the conventional notion of capitalism and competition. He states that they are “opposites….under perfect competition, all profits get competed away”. Instead the real money is in monopolies, “All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition.”

It is upon this statement I wish to speak. News broke today that Gilead, an established biotechnology company, was in discussions with generic drug makers in foreign countries about partnering to bring it’s wildly successful Sovaldi compound, a drug that is shown to cure 90% of hepatitis C patients (a conservative figure), to other nations at an obvious discount. Never mind that this information should be built into the stock, when they announced these plans a month ago. Never mind that Gilead already does this with its HIV drug. Never mind that this expands Gilead’s reach in the growing hepatitis C epidemic. Instead the market sent Gilead down by as much as 8% today, touching $97.55 on volume exceeding average daily volume merely hours into the day.

Sure it would be a great time to take profits in Gilead after it has nearly doubled its share price in the last 52 weeks. But something about the volume today (Read: Fear, Panic, Pandemonium) tells me the people who sold haven’t been in this stock since it was trading at $58.81 52 weeks ago. These people didn’t fail to escape competition; they refused to compete in the first place, even when all signs said that Gilead was laying the groundwork for a global monopoly. This behavior is why capitalism and free markets succeed, let alone exist. There will always be emotional rip tides to profit from.

 Right now the biggest risk to Gilead is competitors competing with them on price. Well the first step to doing this is introducing a drug that is at least as effective or more effective than Sovaldi, something that has yet to be done. The day will come when Merck, or the other big pharms, come up with a successful and effective compound that cures hepatitis C, but it may be too late. They might be best advised to concentrate their efforts on curing fatty liver disease, a growing concern right here in the United States. Gilead has the advantage of being first and all the perks that come with it. They have an established product that cures one of the worst diseases in the world, albeit at a steep price. Ask Dell how it fared on competing with Apple on price.

By setting up shop in foreign markets, where hepatitis C inducing conditions can be even worse than in the U.S., Gilead is introducing dynamic pricing. Yes people get bent out of shape over the cost for the entire cure in India rumored to be less than the cost of a single pill in the U.S., but I’m sure I don’t have to remind you that in the U.S. a liver transplant costs half a million dollars. The best argument justifying Sovaldi's high sticker price comes from a July report from the California Healthcare Institute where near the end of the report they mention the following concerning Solvadi's  price:

Interestingly, previous treatment regimens for hep C cost the same or more (depending on the length of treatment), take at least twice as long to administer, are less effective and can often require other health care services.

  $84,000 is a significant amount of money and I am not trying to be deliberately insensitive here (okay, I am) but this tweet basically sums up my thoughts about these fearful investors: 

...and here i thought turkmenistan would be able to support sovaldi for 84k $GILD
— zach (@zbiotech) September 5, 2014

Fear is the killer of competition, and it leads to panic. Gilead’s stock closed today at $105.06, down 1.68% for the day, but a far cry from the $97.55 it plummeted to in haste this morning. I don’t need to lament how if you bought on the “bad news” you’d already be up a substantial percent. While the jury may still be out on Peter Thiel’s theory on monopolies one thing is for certain; the behemoth corporations that exist today didn’t get anywhere acting out of fear. Instead they preyed on it.

Follow Wesley Vaughan on twitter @bragavaughan

Disclosure: I am long Gilead.