Background: As one of a small number of medical doctors writing on Seeking Alpha, and in view of the importance of hepatitis C treatments to the stocks of several companies that SA readers follow, I wanted to review the disease and its current and upcoming treatments first from an accessible technical direction, and then relate this to the stocks of Gilead Sciences (NASDAQ:GILD) and AbbVie (NYSE:ABBV).
Introduction: A virus is a non-living parasitic entity that replicates (reproduces) inside a host cell. That host cell could be a one-celled organism, such as a bacterium; or it could be a complex animal, such as a human being. Viruses preferentially "like" certain cells better than others. In humans, several classes of viruses "like" liver cells. The two most important "species" of virus that do chronic damage to liver cells are classified as hepatitis B and hepatitis C viruses.
One difference between these two types of virus is that hepatitis ("hep") C lacks a prolonged intracellular existence which would protect it from antiviral therapy. Thus, it is far more curable than hep B. Various cures for hep C have been developed, but recently, the pace of breakthroughs has accelerated. Some noteworthy things that have occurred are the development of oral, convenient and very effective treatments- an unusually rapid evolution that has led to the hope that as with smallpox, hepatitis C could be eliminated from the earth. The U.S. CDC has an extensive review of hepatitis C. Many other hepatitis C resources exist.
Several different types of hepatitis C exist. These are often called genotypes, and each genotypes may have subtypes. For example, the most common genotype ("type" herein) of hepatitis C in the U.S. and probably worldwide is hepatitis 1, which has 1a and 1b as subtypes. Unfortunately, hepatitis C genotype 1 has been considered the most resistant to treatment, as well as being the most common.
A mainstay of treatment has been an immune system booster known as interferon (technically produced via a chemical process called pegylation, therefore often called peg interferon for short). Interferon has been a breakthrough in several fields of medicine, but it has significant side effects, in addition to being an injectable and not oral treatment. Another mainstay of hepatitis C treatment has been the oral medicine, ribavirin. Ribavirin is taken twice a day, and too often, has bothersome or severe side effects, including anemia, that may be mild or worse than merely mild. So, an important goal of curing hepatitis C involves getting rid of interferon; a secondary goal is getting rid of ribavirin.
In reading press releases and other information about the drugs that Gilead, AbbVie and others are developing, you will see the mysterious terminology "NS" before a drug's name. In this case, "NS" refers to non-structural, indicating that the anti-viral action is against (say) a protein that is not part of the outer, structural "coat" of the virus.
Epidemiology: Hepatitis C is transmitted by sex, blood transfusions and other bodily fluid exposure, shared needles, and other parenteral means. AbbVie recently filed for marketing approval in Europe, and said:
Globally, approximately 160 million people are chronically infected with hepatitis C2 and an estimated 3 million to 4 million people are newly infected each year.3 In Europe, approximately 17.5 million people have chronic hepatitis C,4 with GT1 as the predominant genotype.4
The CDC has estimated that about 3.5 million Americans are infected with hep C. Japan is also a significant market, where liver cancer due to hep C is a serious problem. Altogether, there may be 25-30 million people infected with hep C who may have the health insurance or personal wealth to be very profitable customers for the pharma companies that develop and market effective treatments for this disease. In addition, an unknown but non-trivial amount of new infections occur steadily, and there is no vaccine against hep C.
From a stock market standpoint, my view is that the infectious nature of hep C makes widespread treatment of it both important from a health standpoint and, crucially, important politically. Hep C is about four times as common as HIV. It is also a scary disease: It has been estimated that chronic, untreated infection with hep C lowers one's lifespan by 15 years and raises death risk 12-fold.
Thus, I look at hepatitis C as a public health priority, one that will continue to be funded in good times and bad.
Modern treatment regimens: Late last year, Gilead attained approval of Sovaldi (sofosbuvir) to treat types 1-4 (almost all cases). Also, Janssen, a division of Johnson & Johnson (NYSE:JNJ), obtained approval to market Olysio. The combination of Sovaldi and Olysio has been commonly used, and a standard course of treatment reportedly retails for $150,000. JNJ has recently filed a supplemental NDA for use of Olysio in combination with Sovaldi. However, Gilead's upcoming big gun is the combination of Sovaldi with a different drug, ledipasvir. This will be one pill, once a day. The initial filing was for type 1 hep C. It is being considered as a breakthrough drug product by the FDA; the PDUFA date is in October 2014. Sovaldi works through a genetic (RNA) mechanism, while ledipasvir works on the non-structural protein system, and when the two are given together, there is very high efficacy and tolerability.
Let's start with a brief discussion of Sovaldi as mono-agent. Sovaldi acts to directly block the replication of the genetic material of the hep C virus, which is an RNA virus. Sovaldi is given once a day, and can be taken with or without food. Side effects are remarkably few. Sovaldi is effective to some degree alone, but it is always going to be given with at least one other agent. Sovaldi is approved for treatment of genotypes 1-4, but likely is effective on the other genotypes above 4, which are rare in the U.S. Sovaldi is so close to the perfect medicine that it could be the leader in its space for quite some time- but the pace of change in the hep C field is intense, so we just do not know.
Because Sovaldi will not be monotherapy, Gilead has developed ledipasvir, which inhibits the activity of a protein needed for viral replication. A number of studies have proven close to 100% cure rates with sofosbuvir plus ledipasvir, without ribavirin, with very low relapse rates and very few side effects. The New England Journal of Medicine has made some articles on this topic freely available, due to the high level of public interest in them. These include this on the sof-ledi combo that is quite impressive.
Gilead has filed an NDA for a sofosbuvir-ledipasvir combination, which will also be dosed as one pill, once a day. Its PDUFA date at the FDA is in October, and approval appears highly likely. While the filing is for treatment of genotype 1, Gilead is studying this combination in other genotypes. I expect wide use of sof-ledi.
Gilead has a follow-on protein inhibitor to be used with sofosbuvir that would be the next-generation product beyond the combo with ledipasvir. As Gilead has done with its HIV regimen, creative destruction is the order of the day with its drug products. This business technique has kept Gilead as the leader in HIV treatment year after year; there is no clear reason not to think it will do the same in treating hep C (though one never knows).
Next up in the hep C field to compete with an all-oral regimen marketed by one company is AbbVie, which was the old (and still going strong) Abbott Labs' specialty pharmaceuticals division. AbbVie's mainstay, Humira, a biologic that treats autoimmune conditions, faces generic competition soon, and AbbVie is looking for a hep C franchise to help save its stock price. This may be a tough fight until it develops a second-generation treatment regimen. Here's why.
AbbVie has been asked more than once if it will compete with Gilead on price, and has denied it. As in politics, I think that a sensible guiding principle is to think that nothing has been confirmed until it has been officially denied. Based on what we know, AbbVie will need some give on price to get meaningful sales. Its regimen involves four drugs, three of which are active and another that boosts blood levels of at least one of the three actives. One of them must be given twice daily, and that's problematic for doctors and patients unless this regimen is superior to the alternative regimen -- because adherence to/compliance with any regimen requiring twice-a-day dosing is believed to be less likely in the real world than in clinical trials, and inferior to a once-daily regimen. Furthermore, one of the three active drugs, the unidentified compound ABT-450, apparently requires a low dose of the HIV treatment, ritonavir (Norvir as a stand-alone brand product), in order to achieve therapeutic blood levels. Ritonavir, even at low doses, has a number of possible side effects.
The NEJM has an article on the AbbVie regimen. It documents a risk of liver complications from this treatment:
The most frequent grade 3 or 4 laboratory abnormalities observed during the treatment period were elevations in total bilirubin levels (in 37 of 380 patients [9.7%]), which predominantly reflected elevated indirect bilirubin values; patients with such elevations did not have concomitant abnormalities in aminotransferase levels of grade 3 or 4...
Six patients (1.6%) had post-baseline elevations in the alanine aminotransferase level of at least grade 3 during treatment or within 30 days after the end of treatment. Four of these patients completed the study treatment, with normal or grade 1 alanine aminotransferase levels in the post-treatment period; all four had a sustained virologic response by post-treatment week 12. In one of the two patients who prematurely discontinued the study treatment, the elevated alanine aminotransferase level was due to acute hepatitis; in the other patient, the elevation occurred after discontinuation of the study drug.
The above is a bit problematic, and perhaps more than a bit. 10% of patients being treated for hepatitis developed elevated bilirubin, thus indicating liver dysfunction; and 2% developed elevated liver enzymes. This is not good optics, especially in a new regimen to treat liver disease. I think that AbbVie has some issues, unless this study is clearly unrepresentative.
In general, the drug product or regimen that is second to market gets a fair look from prescribers, but prescribing habits form early. If Sovaldi and the sofosbuvir-ledipasvir combination product are easy to use, well-tolerated and effective, AbbVie will have to do a lot of data mining to get doctors to prescribe its product without cutting deals with payors based on price. AbbVie has indicated that it has robust data on certain populations and/or genotypes of hep C that will get it prescriptions, and there is no doubt in my mind that its regimen will gain some market share. Yet, I wonder if AbbVie isn't really getting this regimen out now so it can learn the market and then move its next-generation drugs through the FDA process.
AbbVie is mentioning in its press release that it has three active agents in its regimen, and it wants us to infer that this is a good thing. That is a dubious point of view, however. Most physicians want to prescribe, and most patients want to put into their bodies, as few drugs as possible. Now, if one drug has more than one beneficial mode of action, that's great. But the usual mode of prescribing and being a patient follows the "Keep It Simple" rule. Think of it as Occam's Razor applied to therapeutics. The simplest regimen that gets the job done is the best, at least in my opinion.
Counterpoints: Please be aware that the above contains a host of forward-looking statements from quite a distance from either Gilead or AbbVie. Only the companies and the FDA know all the data. Of the Gilead and AbbVie products/regimens discussed, only Sovaldi is actually approved by any regulatory agency to be marketed. So, a zone of uncertainty should surround the comparison between sofosbuvir-ledipasvir and the more complex AbbVie regimen.
It must also be mentioned that there is more than one patent suit against Gilead related to sofosbuvir.
Summary: Hepatitis C is now curable, and improved regimens with a high degree of tolerability loom large on the near horizon. This disease is of high interest to public health officials worldwide. My own guess is that perhaps 30 million people are rich enough, usually through insurance, to be strong revenue sources for the corporations that develop and market the best cures. Given that the latest IMS data I have seen (granted, on a chat board) suggests a 200,000 patient run-rate for Sovaldi, if most infected patients get treated, there are many years of high profits for Gilead and its competitors in the pharmaceutical industry to be gained. They will be doing well by doing good.
Because of Gilead's burgeoning, even booming, hep C franchise; its HIV franchise that it improves as rapidly as it can; and due to other growth areas, my own view is that its GAAP earnings of $1.33/share in Q1 are quickly going to be surpassed, perhaps as soon as Q2, but if not, in Q4 and next year, when Japan should open up to Sovaldi and the combination product. $10/share at a mere 16X P/E suggests a double, and this may be around the corner.
AbbVie has some troubles, given Humira's pending patent expiration and the uncertainties with obtaining a real home run in the hep C field. The company does, however, have other pipeline products and other branded products. Given the obvious issues, my sense is that there is little compelling reason to purchase ABBV shares; there also is probably little compelling reason for satisfied ABBV shareholders to sell.
Conclusion: Based on my own review of the publicly available data and comments by various experts, and on my knowledge of blockbuster drug product launches, I remain persuaded that GILD could be analogous to Apple (NASDAQ:AAPL) of about four years ago, when the iPad was introduced to a delirious reception. AAPL was up a lot from earlier years, the crash year of 2008 notwithstanding, yet it began 2010 around $200, and the rest is well-known history. GILD is "high," but its hep C franchise could be so powerful, and its other business lines and pipeline so strong as well, that it is possible that investors who are not long GILD might, fairly soon, look back at today's GILD price and wonder why they missed the new rocket.
It is not just I who thinks that way. S&P's Capital IQ recently updated its assessment of GILD's prospects, and believes that the fair value per share is $176.
GILD clearly has earnings momentum, is rapidly regaining price momentum, and may be one of the most undervalued stocks in the United States. My assessment of its current and near-term positioning in the hep C market is also bullish, and I suspect that the Street may be overestimating the competitive threat from AbbVie and other companies.
GILD, thus, appears to be a rare situation. It's trading around 11X forward estimated next 12-month earnings, and those earnings could come in nicely above expectations. Yet, its historical P/E is around 22X, per Value Line.
If there's a bubble in the stock market, it is not present in GILD shares, that's for certain.
Disclosure: I am long GILD. 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.
Additional disclosure: Not investment advice. I am not an investment adviser. All information presented is believed by me to be accurate (typos excepted), but please check any and all such assertions made herein before investing in GILD or ABBV based in whole or in part on this article. Accuracy in all respects cannot be guaranteed. Also note that I am a retired physician and was not a specialist in liver or infectious diseases.