Gilead Sciences Inc. (NASDAQ: GILD) is the recent recipient of a curious analyst upgrade. The broad markets are sliding even lower and dragging most companies down with them, especially the health care sector, and biotech companies specifically. However, a Merrill Lynch analyst sees some stabilization in the hepatitis C (HCV) market in 2016 that might allow for this biotech to stay above water this year. Merrill Lynch upgraded Gilead to Neutral with a $107 price objective.

Looking back at previous ratings, one main thesis for Merrill Lynch’s downgrade in late 2014 was that competition would lead to significant rebates and pricing erosion for the HCV market. The firm had estimated a rebate in the 30%-to-35% range, and it turned out the average rebate was as much as 46%, according to Gilead. Merrill Lynch sees a stabilizing trend in pricing and projects 10% further erosion in 2016. The further price cut is already expected by the market, in the firm’s view.

In its report, Merrill Lynch detailed:

We surveyed 81 US physicians who collectively treat ~21,700 hepatitis C (HCV) patients to gauge their thoughts on treatment rate, patient flow and product preference. According to our survey, diagnosis rate will likely increase over the next few years along with the treatment rate and new competitions are viewed as comparable to Harvoni. Though weekly new patient addition for Harvoni peaked at 4,277 in February 2015 and has since declined to ~2,600, we believe the treatment rate is close to trough levels.

These physicians surveyed are acutely aware of payer restrictions and indicate that fewer than 20% of patients have the freedom to choose the HCV regimen of their preference, according to Merrill Lynch.

Separately, UnitedHealth Group Inc. (NYSE: UNH) and Anthem Inc. (NYSE: ANTM) recently updated their Harvoni treatment criteria, removing the fibrosis score requirement. The brokerage firm believes the lifting of the restrictions would result in more patients being treated in the future.

Merrill Lynch concluded its report:

Gilead has declined 23% from its peak of $122/share and trades at 8.2x our 2016E earnings. It is also one of only two biotech companies that pay out a regular dividend at 1.85% yield. We believe Gilead’s current valuation fairly reflects the company’s position in the HCV market with some upside from new diagnosis and the anticipated introduction of pan-genotypic regimen SOF/VEL in June. Against the backdrop of a weak equity market and volatile biotech tape, we see more investor interest in Gilead with its robust cash flow, low multiple, and dividend.

Shares of Gilead were trading down 1.7% at $91.44 on Friday, with a consensus analyst price target of $123.44 and a 52-week trading range of $86.00 to $123.37.

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