Recent action in the hepatitis C treatment market
There has recently been a spate of announcements in the hepatitis C treatment space and doctors have generally welcomed the entry of more drugs to provide more treatment options. They also generally agree that Gilead Sciences' (GILD) Sovaldi is the market leader. However, the company has been under fire for the $1,000 price tag of each pill of its drug even considering data presented at the European Association for the Study of the Liver conference in London showed a 94% cure rate after eight weeks of treatment for the experimental drug. Trial results presented at the same conference by Merck (NYSE:MRK) showed that 12 weeks of treatment with its combination of two drugs showed a 98% cure rate of patients who had not been previously treated. AbbVie (NYSE:ABBV) and Bristol-Myers Squibb (NYSE:BMY) are also in the process of developing new generation oral hepatitis C treatments that have shown cure rates of more than 90%.
Meanwhile the World Health Organization has estimated that 150 million people throughout the world suffer from hepatitis C which is an infection on the blood often caused by needles that have been contaminated. Before the launch of Sovaldi, at the end of last year, patients had to be treated for several months with a number of drugs such as interferon whose side effects included symptoms resembling a severe flu and ribavirin which also has negative side-effects such as anemia and rash. The combination of Sovaldi and ledipasvir, an experimental drug (known as a NS5A inhibitor) was reported to be more effective than the combination of the drug and ribavirin. The US FDA has granted priority review status to the application for the daily dosage of Sovaldi and ledipasvir and is scheduled to decide on the marketing application by early October 2014.
Many experts are saying that this company is the best of the bunch and believe that annual sales could be in excess of $9 billion because of the simplicity of its design. It's essentially one pill that is a combination of two drugs and only needs to be taken once a day. The company is already doing extremely well with its other products and is generating a substantial amount of cash flows from operations. For the last four quarters, free cash flow has been in excess of $600 million despite a doubling its research and development expenditure over the last four years to $500 million. In addition, the blockbuster potential of Sovaldi can be expected to substantially boost both revenues and earnings. This is a rock solid biopharmaceutical company with spectacular growth prospects and, over the past few weeks, EPS estimates for the current quarter have risen from $ 0.73 per share to $ 0.75 per share and from $ 3.75 share to $ 3.92 per share for the full year.
The shares at its current price of $ 69.28 are substantially undervalued and there is a compelling case for buying. Estimates of fair value for the company's shares range from $ 100-$132 and the upside is therefore significant. The biotech industry has suffered a recent downturn making this potentially a great buying opportunity for quality companies at discount prices.
The results of mid-stage clinical trial data presented at the European Association for the Study of the Liver (EASL) indicate that the company is going to be highly competitive when it comes to hepatitis C treatment. The two drug combination showed a cure rate for 98% of the patients without cirrhosis who had not been previously treated. Current standard treatments have to be administered for up to 48 weeks with a cure rate of approximately 75%. In terms of timeline, Merck is slightly behind its rivals but, because it is also trying to produce a one pill, once a day regime. It is arguably the most serious contender to Gilead's Sovaldi. The most common side-effects with the Merck drugs were reported to be nausea, tiredness and headaches.
Considering that Gilead is charging top dollar for its superior treatment, it will be interesting to see whether Merck is willing to compete on price in order to gain market share. Moreover, Merck is around 18 months behind its rivals and it remains to be seen how much of a competitive disadvantage this will turn out to be.
The stock is currently trading at approximately $56.25 and is likely a full and fair value. At this point, it may be in an investor's best interest to take no action for the moment but watch the developments on the hepatitis treatment, among others in the pipeline, before making an investment decision.
A combination of two drugs developed by the company for hepatitis C treatment is reported to have cured 90% of patients who had not been previously treated and 82% of patients who did not respond to previous therapy. The phase 3 trial used a combination of the company's daclatasvir and asunaprevir over 24 weeks of treatment. The cure rate was also 82% for patients unable to tolerate interferon and ribaviri and 84% for patients with cirrhosis. Though this picture looks like the worst of the three, it must be noted that the patient population was significantly more complicated.
At its current trading price of approximately $49.10, I believe that there is limited scope for any capital appreciation at this time and that there are better values in the healthcare sector elsewhere.