Investors are underestimating the negative impact that upcoming macro trends and potential government actions could have on the HIV drug market, warned Citi. As a result, the firm downgraded GlaxoSmithKline (GSK), whose joint venture, ViiV, has a leading HIV treatment. The firm believes Gilead Sciences (GILD) would have an advantage over other players in the market if the Affordable Care Act, or ACA is not repealed, while Merck's (MRK) HIV treatment, contrary to market expectations, could be a "category killer." The Street, which sees the HIV market as primarily a battle between Gilead and ViiV, has an "oversimplified" view, according to the firm.

MACRO FACTORS: The growth of the overall HIV market is slowing "as Medicaid enrollment (spurred by the ACA) plateaus," wrote Citi analyst Andrew Baum today in a research note. Moreover, the repeal and replacement of the ACA could cause the HIV market to decline by increasing the number of people who are uninsured and making insurers and other payers more cost sensitive regarding HIV treatments, the analyst stated. He estimated that if a law is passed that repeals and replaces the ACA, the overall HIV market will decline by $2.3B annually. That is because the number of underinsured people with HIV would increase by about 8,000 and drug prices would drop due to Medicaid caps and potential state waivers, the analyst explained. ViiV, a joint venture of GlaxoSmithKline and Pfizer (PFE), would have a short-term advantage if the ACA is repealed and replaced, according to Baum. GlaxoSmithKline's "likely greater willing willingness to compete on net pricing" would give ViiV the upper hand, the analyst stated. However, the opportunity would disappear after a short time, as Gilead could "preserve pricing for its novel BIC/F/TAF triple yet provide heavy rebates on older drugs Genvoya and Stribild," the analyst stated. He downgraded GlaxoSmithKline to Neutral from Buy and kept a Sell rating on Pfizer.

GILEAD: The company would have an advantage if the ACA is not repealed, as it would continue to gain market share, assuming that payers don't adopt "restrictive" policies, wrote Baum. Gilead would have an advantage because clinicians are less concerned about patients developing resistance to its drugs compared with ViiV's treatments, the analyst stated. However, he expects ViiV to do better outside of the U.S. because payers there are more price sensitive.

MERCK: The company's EFdA treatment can be "a category killer" in both patients with HIV who have not yet been treated and as an HIV prevention mechanism, according to Baum. He expects the treatment to be approved in 2021 for people with HIV who have not yet been treated and in 2022 as a prevention mechanism. The analyst says that analysts have not yet factored the drug into their estimates.

BETTER STOCKS: Baum prefers the shares of AstraZeneca (AZN), Roche (RHHBY), Bayer (BAYRY), Bristol-Myers (BMY) and Eli Lilly (LLY) over the stocks previously named. He kept Buy ratings on AstraZeneca, Roche, Bayer, Bristol-Myers and Eli Lilly.

PRICE ACTION: In morning trading, GlaxoSmithKline lost 0.7% to $42.45, Pfizer also fell 0.7% to $33.60, Gilead inched down 0.1% to $70.60, and Merck fell 0.3% to $64.