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In October the independent DMC (Data Monitoring Committee) recommended that a Phase 3 trial of Gilead's (NASDAQ:GILD) new cancer drug idelalisib be cut short because of clear evidence that the drug was benefiting patients.

Analysis showed that people taking idelalisib plus another medicine, Rituxan (a drug made by Roche), survived longer without their cancer progressing than those taking Rituxan alone.

The drug has already been submitted to the FDA for approval as a treatment for NHL (non-Hodgkin's lymphoma) and now Gilead plans to submit another application for CLL (chronic lymphocytic leukemia).

Gilead has an ambition to become a player in the cancer arena. A good start of fulfilling that ambition would be the launch of its first drug, idelalisib, next year.

The launch of idelalisib will put it on a collision course with ibrutinib, a much publicized leukemia drug developed by Pharmacyclics (NASDAQ:PCYC) and Johnson & Johnson (NYSE:JNJ) that could hit the market in early 2014.

Idelalisib

This DMC recommendation to cut short the trial was based on a predefined interim analysis showing highly statistically significant efficacy for the primary endpoint of progression-free survival in patients receiving idelalisib plus Rituxan, compared to those receiving Rituxan alone.

Behind a recommendation of the DMC in such (rare) cases is an ethical consideration: it is not fair for the control group to be treated with an inferior drug or placebo. With the trial ending, all patients are given the opportunity to receive the new drug.

The interrupted trial was a Phase 3, randomized, double-blind, placebo-controlled study.

The study enrolled 220 adults with previously treated CLL who required treatment but were not fit for chemotherapy. Eligible patients were randomized to receive eight infusions of Rituxan over 24 weeks plus either idelalisib (150 mg) or placebo taken orally twice daily continuously until disease progression or unacceptable toxicity.

Patients whose condition worsened in Study 116 were eligible to receive active idelalisib therapy in a double-blind extension study (Study 117).

The drug represents a new class of targeted therapies that inhibit B-cell receptor signaling.

The PI3K pathway is hyperactive in CLL, and idelalisib is the first drug to inhibit the PI3K subtype and reduce proliferation, homing and retention of malignant B cells.

Idelalisib is being developed both as a single agent and in combination with other drugs.

Three Phase 3 trials are underway testing the drug in combination with other agents, with Arzerra from Glaxo (NYSE:GSK) and Genmab with Rituxan, the trial that was just stopped, and a combination of Rituxan and Treanda (from Teva (NYSE:TEVA).

Idelalisib may offer options for CLL patients where few exist. In a previous Phase 1 trial half the patients with relapsed or resistant CLL who were treated with idelalisib experienced rapid and prolonged tumor shrinkage.

A Phase 2 study is conducted in double-refractory iNHL (indolent non-Hodgkin's lymphoma).

INHL refers to a group of largely incurable slow-growing lymphomas that usually come back after therapy and lead ultimately to life-threatening complications.

Most iNHL patients are diagnosed at an advanced stage of disease, and median survival from time of initial diagnosis for patients with the most common form of iNHL, follicular lymphoma, is 8 to 10 years. The outlook for refractory iNHL patients is significantly poorer.

In future studies, investigators will use a 150 mg dose twice daily because there appears to be a plateau of dose exposure, and elevated liver function tests, though not common, occurred more frequently in patients who received higher doses of the drug.

Ibrutinib

In July Johnson & Johnson with partner Pharmacyclics submitted ibrutinib to the FDA for approval. They requested indications for previously treated patients with CLL and also for use in MCL (mantle cell lymphoma).

If approved, the oral drug would be the first in the class known as BTK inhibitors.

Abbott Labs (NYSE:ABT) has been chosen to develop a test using its FISH (fluorescence in situ hybridisation) technology to identify patients with high-risk CLL who have a deletion in chromosome 17. These patients respond poorly to chemotherapy, but ibrutinib should yield better results.

Ibrutinib's chances of approval for CLL are greatly improved with the existence of a companion diagnostic test, and Pharmacyclics cannot have hoped to develop one in-house.

A reliable test for patient stratification helps convince payers that the therapy is worth reimbursing, and could also give Pharmacyclics and J&J a reason to price it at a premium.

Shrinking a drug's target patient population can be an advantage if it increases the chances of getting the drug approved and reimbursed.

Current treatments (which include Rituxan) offer patients a trade-off between toxicity and effectiveness, and in old age, toxicity impacts the body harder. In CLL the median age at diagnosis is 72 years.

Ibrutinib is less toxic than Rituxan. In Ibrutinib's Phase 2 trial which went on for two years, only 12 percent of newly diagnosed and 6 percent of relapsed patients had to drop out due to adverse events.

Market

Typically diagnosed through a routine blood test, CLL is characterized by a slow increase in B lymphocytes, causing cancer cells to spread through the blood and bone marrow as well as the lymph nodes, liver and spleen. According to the National Cancer Institute, approximately 15,680 patients will be diagnosed with CLL and 4,580 will die from the disease in 2013.

Currently, patients are often prescribed a combination of chemotherapy and immunotherapy, but the vast majority will relapse after initial treatment, and approximately 20 percent of the patients have resistant disease that relapses within six months or does not respond to therapy at all.

Gilead: For idelalisib Thomson Pharma has forecast peak potential sales at around $500 million by 2017, Oppenheimer projects $700 million.

Using idelalisib in combination with Rituxan was a clever idea from Gilead rather than to compete with it directly. Even though the drug will be the third of the next-generation drugs to the market, doctors may be more willing to add on to a well-known therapy than switching to an entirely new one.

J&J: Goldman Sachs believes that ibrutinib can generate $5 billion in peak sales in CLL alone.

As a comparison, Gleevec generated $3.5 billion in peak sales in CML (chronic myelogenous leukemia ) for Novartis (NYSE:NVS).

But the CLL market is three times the size of the CML market, and ibrutinib will be priced at a 50 percent premium.

Ibrutinib's attraction, in part, lies in the fact that it is a pill and that it could eventually be used without chemotherapy, which is risky in CLL's mostly elderly patient population. A Forbes report described ibrutinib as "the Gleevec of CLL," referring to the Novartis blockbuster that was initially approved for a rare form of leukemia and which now has 11 approved indications.

Competition

While as a single agent ibrutinib appears more efficacious in CLL, MEDACorp's key opinion leaders view the combination data to date for idelalisib or ibrutinib with Rituxan to be equivalent.

Also, unlike ibrutinib's trials, the idelalisib trial is randomized, which means that Gilead will likely be able to meet European Union requirements before J&J/Pharmacyclics does.

Analyst Mark Schoenebaum of ISI Group wrote to clients that idelalisib might start competing with ibrutinib as early as six months after ibrutinib's launch.

Schoenebaum noted that much will depend on the yet-to-be-reported data on toxicity and duration of treatment, in both of which ibrutinib was particularly strong. The data may be reported at the American Society of Hematology conference in December.

Investors' summary

With revenue of $9.4 billion in 2012, Gilead gets the lion's share of its sales from HIV and AIDS medications.

Especially successful are two HIV therapies: Complera, a fixed-dose combination of Edurant and Truvada, and Stribild, a fixed-dose combination of elvitegravir, cobicistat and Truvada.

Stribild has performed well ever since its launch in the U.S. in August 2012. Sales of the drug climbed 8 percent to $99.4 million in the second quarter of 2013 from the first. The EU approval of the drug in May 2013 can further boost sales. Sales of Complera/Eviplera, launched in 2011, climbed 22 percent sequentially to $188.7 million in the second quarter of 2013.

At the end of June Gilead had $2.98 billion of cash and cash equivalents compared to $2.58 billion as of December 31, 2012. During the first half of 2013, the company generated $1.63 billion in operating cash flow.

Gilead expects 2013 product revenue in the range of $10-$10.2 billion, reflecting an increase of 6 percent to 9 percent over 2012 levels.

By combining multiple pills into one, Gilead improves compliance, a major issue in HIV treatment, and creates a significant advantage over competitors' multi-pill regimens.

The company could derive more cash flow from the HIV franchise prior to the patent cliff than is currently anticipated.

The newly developed GS-7340, now in Phase 3, an improved version of Viread, is a prodrug that more efficiently delivers tenofovir into lymphoid cells and tissues, resulting in higher antiviral potency at greatly reduced doses and lower systemic exposure. The new drug may help Gilead to sustain its success in HIV therapies.

Another potential blockbuster Sofosbuvir (GS-7977) may become a key backbone therapy in an all-oral HCV regimen. The drug, in combination with generic ribavirin, could get its initial approvals next year.

Currently, the global market for Hepatitis C is estimated at approximately $2 billion and is predicted to reach more than $10 billion in the next ten years.

The first company to get approval for the next generation drug for treating Hepatitis C will have a first mover advantage in the market. This is because physicians are progressively deferring to treat patients with available, approved drugs.

Gilead has been pushing to become a bigger player in cancer treatments, and it could launch its first drug, idelalisib, next year. Idelalisib's success in trials shows that the $375 million Gilead paid in 2011 to buy the drug's developer, Calistoga Pharmaceutical, was money well spent.

Another area of upside growth is margin improvement. Gilead EBIT margin could go from 42 percent to 50-60 percent, as estimated by RBC Capital Markets analyst Michael Yee. EBIT margin is the ratio of operating earnings over operating sales.

At 21 times of estimated 2014 earnings, Gilead is probably one of the best biotech investments you can make in the S&P 500.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Gilead Vs. Johnson & Johnson In Cancer Race