In my recent articles on Gilead Sciences (NASDAQ:GILD), I have focused on its hepatitis C franchise, most notably the marketed product, Sovaldi. The phenomenon of Sovaldi is so remarkable that it has overshadowed a growing amount of good news coming out of several R&D projects at Gilead. My goal in this article is to bring other developments at Gilead to the attention of Seeking Alpha readers. I believe that if investors take a comprehensive look at Gilead, they may be willing to grant GILD a higher valuation than they do now. Gilead has, and has had, a productive R&D effort, which continues.
The extent of this becomes clear when reading not only the 10-K, which reviews Gilead's product development history, but in unexpected places. To wit, I was reading a Northern Trust Asset Management review of Johnson & Johnson (NYSE:JNJ). Here is the final paragraph:
During the quarter, the Janssen division submitted an NDA for the once-daily, combination of JNJ's Prezista with Gilead's cobicistat, a boosting agent, for HIV. It seems that everywhere you turn these days, Gilead's innovative products are showing up.
Readers who would like to learn more about Gilead and Sovaldi might be interested in reading one or both of the following articles that I have published on Seeking Alpha: The April 23 article following earnings titled "Sovaldi's Q1 Is A Home Run With Men On Base; Why Gilead May Triple From Here", and the May 12 article comparing Gilead's and AbbVie's (NYSE:ABBV) impending direct competition in hepatitis C treatment.
I began following Gilead several years ago, when it made what I thought was a questionable acquisition of CV Therapeutics, in a bid to move beyond anti-viral disease treatment and strengthen its cardiopumonary franchise. The product of interest at CV Therapeutics was Ranexa, an anti-anginal product with a unique mode of action (consistent with Gilead's focus on innovation). However, anti-anginals are not high-growth anymore given how common angioplasty as well as bypass surgeries are, and Ranexa struggled. Similarly, GILD struggled until it acquired Pharmasset to gain control over Sovaldi in early 2012. From that point on, the stock steadily rose, despite uninspiring earnings growth, as Sovaldi proved amazingly effective and safe even in the development stage. Investors began not only to forget about the CV Therapeutics purchase, but also began to ignore the maturing of Gilead's dominant HIV franchise. The focus during that period was on sofosbuvir (Sovaldi) coming to market and establishment of an anti-hep C franchise.
The shoe is just a bit on the other foot now. The Street is looking forward to the maturation of Sovaldi and follow-on products, such as the sofosbuvir-ledipasvir combination product awaiting FDA approval, possibly in October. Investors want to also see growth prospects beyond Gilead's hep C franchise, and this article was written to partially address that concern.
Below, I discuss recent studies that Gilead has announced results of and other research aspects that the company has emphasized, that I view as positive regarding GILD's growth prospects other than in hepatitis C.
First, I discuss a potential advance in antiviral therapy that could have a large profits payoff for years to come: the first effective treatment for respiratory syncytial virus, widely known as RSV.
RSV - something curative this way comes?
So it is hoped. Gilead has announced exciting Phase IIa results for GS-5806, an oral drug candidate for RSV. Response rates were high, and all primary and secondary endpoints were satisfied. The results were strong enough to suggest that an FDA-approved product has a good chance of emerging in a few years.
RSV is a common illness. It is often serious in premature infant and young babies, and can be serious in some adult pulmonary patients, the elderly and the immunosuppressed. It is a common cause of URIs, as well as self-limited bronchitis and viral pneumonia in healthy adults. Gilead says that the burden of illness caused by RSV is as significant as that caused by influenza.
Gilead discovered the oral influenza treatment, Tamiflu, which it continues to receive royalties on. It has a long history of breakthroughs in antiviral treatments.
GS-5806 could soon be shown to represent a significant scientific, medical and financial achievement.
There is no antiviral treatment yet for RSV, so Gilead should have reasonable pricing power with GS-5806. In the 1990s, Medimmune developed a monoclonal antibody injectable vaccine to prevent RSV, Synagis, a biologic which achieved over $1 B in annual sales. There is no generic alternative to Synagis, which is now reported to be selling in the $300 MM annual range in the U.S. Medimmune was acquired, and serves as the biologics division of AstraZeneca (NYSE:AZN). The Synagis indications are limited. From Drugs.com, these indications are:
Prevention of serious RSV lower respiratory tract infections in infants at high risk for RSV disease.
Recommended for infants <24 months of age who have chronic lung disease (e.g., bronchopulmonary dysplasia [BPD]), history of premature birth (gestational age ≤35 weeks), or hemodynamically significant congenital heart disease (CHD). May reduce severity of RSV infection and reduce frequency and duration of RSV-related hospitalizations in these high-risk infants.
The opportunity for an oral treatment, which would be less expensive than Synagis, is large, as more babies get RSV than those select high-risk infants. Per the NIH, the scope of the problem is defined this way:
RSV is the most common germ that causes lung and airway infections in infants and young children. Most infants have had this infection by age 2...
Infants and children with a severe RSV infection may be admitted to the hospital. Treatment will include:
- Moist (humidified) air
- Fluids through a vein (by IV)
A breathing machine (ventilator) may be needed...
Children who have had RSV bronchiolitis may be more likely to develop asthma.
The last point about possible increased risk of asthma from RSV may be important in driving usage of this product. If Gilead is able to point to long-term health benefits from its medicine, that will enhance both unit sales and presumably pricing as well.
This looks like a financially meaningful opportunity to Gilead, which by now is a large pharmaceutical company. I'd envision a liquid formulation that can be added to baby formula or pumped breast milk. Happily, RSV can be diagnosed by a nasal swab, so sick people can be identified.
The market for an RSV treatment would not be limited to babies, however. How large the non-infant market may be is not something I have enough knowledge to comment on.
I'm unaware of whether any other companies or research labs have had any success in developing drugs that would be competitive with GS-5806.
Next, we go to Gilead's efforts to maintain and extend its anti-HIV franchise with an improved version of its current tenofovir product, Viread.
TAF - the new and improved Viread
Gilead has begun talking more lately about TAF as a replacement for Viread. This suggests to me that management likes what it sees from the studies done to-date. Extensive Phase III testing is underway.
The active compound in Viread is tenofovir, which is abbreviated TDF in view of its full chemical name, tenofovir disoproxil fumarate. As a standalone product to treat hepatitis B or in combination to treat HIV, TDF is an important molecule. From Wikipedia:
...Viread, belongs to a class of antiretroviral drugs known as nucleotide analogue reverse transcriptase inhibitors (NRTIs), which block reverse transcriptase, a crucial virus enzyme in human immunodeficiency virus 1 (HIV-1) and hepatitis B virus infections.
It is on the World Health Organization's List of Essential Medicines, a list of the most important medication needed in a basic health system.
Gilead says that Viread is the most prescribed drug product for hepatitis B, at least among oral products. Commercially, its greatest importance to Gilead is likely not for the hepatitis B indication, but for its use in combination products to control HIV. These products include the blockbusters Stribild and Complera. However, there are some difficulties with TDF. One is that it is used at 400 mg, which means that it alone makes for a good-sized dose form, which limits the quantities of the other drugs that can be combined with it in one dosage form. A lower-dose version of TDF would allow for potentially superior combinations.
Another problem is with TDF's known or potential side effects. It has been associated with kidney dysfunction; lactic acidosis, which can be fatal; and, loss of bone density. Viread's prescribing information (i.e., the "label") carries this warning in a black box:
Lactic acidosis and severe hepatomegaly with steatosis, including fatal cases, have been reported with... Viread.
A safer product, ideally lacking any black box warning, would be preferable to doctors, patients, and thus to Gilead.
Enter TAF, tenofovir alafenamide fumarate.
Gilead believes it has developed an improved version of tenofovir in its current TDF form. TAF selectively penetrates into lymphoid tissue, which is rich in immune cells, where the HIV(irus) hides. TAF is effective against HIV in approximately an order of magnitude less than TDF. Since TDF quickly circulates in the blood as tenofovir, the entire body is exposed to tenofovir at full dose. TAF, on the other hand, is a "prodrug," and releases tenofovir when activated, which apparently is primarily locally in lymphoid tissue. Note that we do not have full information on TAF and its mode of action, metabolism, etc. For competitive reasons, Gilead is doing what all its peer companies do, which is release information selectively.
The breakthrough with TAF is that tenofovir was altered chemically; a lipid side-chain was added. This is a great example of targeted drug delivery, a sort of Holy Grail of therapeutics, especially with potentially toxic drugs.
Thus, TAF will come to market (assuming it does so) at a much lower dose than Viread or TDF.
Gilead may gain approval on its first TAF-containing product in 2016.
In summary on this topic, a senior Gilead executive recently discussed TAF in a recent conference:
... I want to talk a little bit about the innovation that continues in this area. A lot of you may have heard about TAF. TAF is actually a prodrug of tenofovir. It is much more targeted. It goes directly in the plasma and is targeted on the HIV reservoirs. It is more safe. And as the HIV population continues to age, we think this brings good optionality to HIV patients going forward.
We're able to dose this at a tenth of the dose of tenofovir and as (we: ed.) all know less of anything indicates much more (sic) safer medication. There are currently two Phase 3 studies, fairly large studies that are currently in process. And we expect to read out on those later this year.
We also have several ongoing special population studies for TAF as well. This is really important because the combination of these seven studies, which we expect to be part of the NDA, will allow us to really support a very broad label at large, switching at large as well as special populations...
TAF can be a financial boon to Gilead. If successfully brought to market, TAF could do all of the following: replace Viread/TDF, allow a refreshed lineup of meds for HIV and for hepatitis B treatment, gain some premium pricing over current offerings, extend patent life, and demonstrate Gilead's top-tier R&D capabilities.
I wonder if the potential upside from TAF is fully reflected in GILD's share price.
Gilead recently reported two bits of promising data in cardiology. The first, which reflects more advanced research, involves ranolazine, the active drug found in Ranexa. The company announced what I view as exciting news:
Gilead Announces Results from Phase 2 Study Showing Reduction in Atrial Fibrillation Burden with the Investigational Combination of Ranolazine and Low-Dose Dronedarone
-- Data Presented at Heart Rhythm Society Annual Meeting Support Plans for Phase 3 Development of a Fixed-Dose Combination of Ranolazine and Low-Dose Dronedarone in Atrial Fibrillation Patients --...
About Atrial Fibrillation (AF)
AF is the most common type of abnormal heartbeat, or arrhythmia.
This combo could be an important product, as paroxysmal AF is both fairly common and is often a serious condition. Paroxysmal AF is not easy to treat with current medications, so there is an unmet medical need, a hallmark of Gilead's development efforts.
Gilead has confirmed to me by email that dronedarone will be available generically by the time this combination product will be launched, so no royalties to the current marketer of the Multaq brand of dronedarone will be paid.
A combo of Ranexa's active ingredient plus dronedarone would be a good marketing complement to Ranexa itself and to Letairis, which comprise Gilead's cardiovascular franchise so far. Ranexa as a standalone product is expected to go generic by February, 2019, but the combination product, if approved for marketing, would likely have many years of patent protection.
The other cardiac-related press release was from May 9. In it, Gilead reported encouraging Phase I data on the novel, investigational compound, GS-6615, in studies on the genetic disorder known as long QT syndrome. The positive results are leading Gilead to initiate Phase II studies in this condition as well, in both hypertrophic cardiomyopathy and in ventricular tachycardia/fibrillation.
Collectively, those three conditions represent a large market opportunity for GS-6615. It is too soon to model any revenues from GS-6615, but a company as sophisticated as Gilead did not put out a press release or present these results at the Heart Rhythm Society solely to pump its stock. It must like the prospects of GS-6615.
While the company has had nothing new to announce about the monoclonal antibody, simtuzumab, this biologic is being tested in seven different indications, some of which involve large market opportunities, such as common cancers, while others involve diseases for which there is little or no effective treatment yet, such as idiopathic pulmonary fibrosis.
Gilead has expressed a lot of optimism for simtuzumab, and at least some of the Phase II studies are powered strongly enough that strongly powerful results, if achieved, will allow an NDA to be filed without going through Phase III.
Regarding GILD stock, I have previously mentioned that S&P Capital IQ carried a fair value for GILD in the $172 range, based on its proprietary metrics. That rose to $185 as of last week. I don't know if that is because of changing estimates of out-year earnings for Gilead, or if it's related to S&P perhaps lowering the rate at which it discounts future earnings. (S&P Capital IQ also carries a $130 one-year price target for the shares in a separate part of its report.) No matter. GILD is by far the cheapest stock of those I follow with that metric relative to S&P's proprietary valuation tool.
I think the reason for that was expressed by the same Northern Trust analyst I quoted in the Background section regarding JNJ and Gilead. In his April 22 update of Gilead after Q1 earnings were released, he wrote:
At present, Gilead is the most difficult stock among my coverage on which to make forecasts and to value. The challenges are myriad.
He then went on to list all the uncertainties regarding the extent of future profits from hepatitis C treatment. Essentially, it's unknown as to how many people will be treated using Gilead's products, and what will be the profit per treatment to Gilead.
What I found astonishing is not Northern Trust's uncertainty, but the following point. This April report projected a trading range for GILD over the next 12 months of $60-105. Okay, it is what it is. Note the report itself is titled: "Sovaldi Blows Away All Estimates." However, on March 17, well before earnings were released, the same analyst forecast total Sovaldi plus Sovaldi-ledipasvir combo sales of $3B - which Sovaldi came close to equaling in Q1 alone. Yet, in this earlier report, the analyst forecast a 2014 trading range of $66-114 for GILD shares.
Northern Trust, a mainstream brokerage, lowered its price target for GILD after learning of the breakout sales for Sovaldi and EPS in Q1.
My current take is that the Street may be a bit confused (rationally, to be sure) about the importance of Sovaldi and follow-on products, and has been unduly influenced (again, my opinion) by self-serving publicity from insurers and others, posturing against the high cost of breakthrough medications. Here is a pharma industry newsletter about Sovaldi: "Gilead's Sovaldi set to claim Humira's crown as top-selling drug in 2020".
If you include the combos, I would say that could occur sooner.
Perhaps this is a situation that fits the famous Warren Buffett adage of being bold when others are fearful.
There are substantial risks involved in investing in GILD shares. The shares pay no dividend. Net working capital minus debt is minuscule versus market cap, the anti-HIV market is competitive with generics on effective treatments here and increasing in number over the next few years. Gilead is involved in several lawsuits regarding sofosbuvir (Sovaldi), which could be material. Success in the development projects described above could be lacking. Competition in treating hepatitis C from the several strong competitors in the field could be harder on Gilead's bottom line than the consensus now expects. Gilead's SEC disclosures regarding risks are lengthy and detailed, and in my view, are worth reading before investing in the stock.
Summary: I find Gilead Sciences to be an increasingly impressive company. In sports terminology, it has a deep bench. Investors have many ways to win here, in my opinion. In my 35 years of stock market investing and speculating, I have seen several pharmaceutical companies blast off with a game-changing blockbuster product that transformed the company's bottom line. All led to top-notch long-term capital gains, despite the "late" entry point after launch, at least so far as I remember. Buying into the stock early into a blockbuster's launch has generally worked out very well.
While I am bullish on GILD shares, anything can happen with the economy, the markets, a company, or a stock price, and I have been wrong many times before, and GILD may turn out very differently than I expect. That said, I believe that the probabilities favor a sunny future both for Gilead Sciences and for its shares, and have adjusted my investments accordingly.
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.