Based on its presentation at a JPMorgan Chase (NYSE:JPM) conference Tuesday, Gilead Sciences (NASDAQ:GILD) probably does not have enough newsflow coming before its next earnings report to justify another pre-earnings article. Yet since my last article, GILD has had made a fair amount of news and has had also news from AbbVie (NYSE:ABBV) and others that's relevant to it. With the large cap biotechs (NASDAQ:IBB) breaking down on the charts, a discussion of the very recent news on GILD with comments on ABBV might be helpful to investors in each company. The press releases are found in the usual place on GILD's website.
The thrust of Dr. Milligan's presentation (GILD's president and COO) was to try to reassure investors that GILD's pipeline is strong enough that the stock should have a higher P/E.
Basically my view is in agreement, assuming that the main franchises go well. In a recent article, I suggested a 2016 trading range for GILD that involved a bottom in the mid-$90s and all-time highs on the upper end of the trading range; this assumed no stock market crash. I'm sticking to that view pending the upcoming earnings release.
Much of the recent news has to do with or is related to its liver franchise, so I'll start with that.
1. Gilead Announces U.S. FDA Priority Review Designation for Sofosbuvir/Velpatasvir for Treatment of All Genotypes of Chronic Hepatitis C Infection
This has received the FDA's "NDA double" in that the filing is getting an early approval date of June 28, which should be great assuming approval; plus it was designated as a Breakthrough Therapy.
This could be an under-appreciated part of GILD's growth strategy. It can be thought of as an improved Harvoni, which treats four of the six genotypes of the hep C virus. SOF/VEL, which will likely receive a trade name soon, treats all six. This will make Sovaldi close to obsolete. It should dominate the market for types 2 and 3, which Harvoni does not treat. These make up a significant minority of cases in developed countries. Whether this will net any sales or just transfer them from Sovaldi to the new combo is unclear, and depends on pricing and whether there has been some warehousing of patients by doctors awaiting this approval.
I'm excited about this combo for ex-US, ex-developed market reasons. Now that investors can expect the FDA to approve a once-daily pill that treats every infected patient, less affluent countries can save the expense and delay inherent in genotyping and just treat once a diagnosis of HCV infection is made. The expected FDA approval in June should allow GILD to accelerate its plans to introduce plans to introduce this combo to countries that are not being served by Indian generic manufacturers under license from GILD.
China is the most prominent of them, but the opportunity is broad and wide. At the very least, this product can garner significant incremental sales.
ABBV also made news in HCV. It has now begun Phase 3 studies with a 2-drug, one pill once daily combo that also is intended to treat all HCV genotypes. It is targeting a 2018 product introduction in the US. This combo, which is also discussed on the Clinicaltrials.gov website, includes a protease inhibitor (ABT-493).
In his presentation at the JPM conference, Dr. Milligan discussed GILD's 3-drug combo for HCV, noting that the additional drug on top of the SOF/VEL duo is a protease inhibitor. He warned that in the treatment of HCV, this drug class is prone to unwanted side effects.
This comment strikes me as an indirect shot at the ABBV combo. It also continues to make the point that GILD has been making for some time about the quest to use 3-drug combos to shorten treatment duration below the 8-12 weeks that GILD has brought it to, namely that the FDA is more interested in safety and efficacy than shorter treatment durations.
A 2-year head start with a pan-genotypic product should be huge for GILD. By the time ABBV gets approval, assuming each company is successful in getting to market, GILD's SOF/VEL will have had tens of thousands of patient cures in hand. Its safety profile will be well delineated. Except for special populations such as patients with renal failure where ABBV's combo may have unique applicability, my guess is that ABBV will have to compete on price, where it will have to look at a realistic profit-maximizing strategy.
SOF/VEL represents both an impressive scientific and therapeutic advance and a potentially important product for GILD shareholders.
2. Gilead Announces Top-Line Results From Two Phase 3 Studies Evaluating Tenofovir Alafenamide (TAF) for Patients With Chronic Hepatitis B Infection
This relates to GILD's tenofovir franchise, which is best-known and commercially of greatest importance in treating HIV/AIDS. Most readers probably know that GILD has been replacing its initial innovation, namely a version of the important antiviral agent tenofovir in "TDF" (oral) form with the much more potent oral agent "TAF." The "T" in each acronym is tenofovir, but the formulation of TAF is much more potent, meaning that much less tenofovir needs to be given to achieve the same antiviral effect. This in turn minimizes toxic side effects of tenofovir on bones and kidneys.
In the case of hep B, tenofovir is used in TDF at a 300 mg dose, whereas the TAF version uses tenofovir at 25 mg. In the Phase 3 studies, the TAF product was found to be non-inferior to Viread in the primary endpoint of viral suppression. It had fewer bone and renal side effects and also was superior in at least one marker of liver injury.
Assuming FDA approval late this year or early next year, it would not surprise me to see GILD try to effectively withdraw Viread from the market as the new product came on-line. Whether GILD can actually withdraw Viread and ask that all Viread patients be switched to the new product in the absence of a formal switching study is an open question. However, if the pricing of the new product is below that of Viread, maybe a lot of switches can be accomplished before Viread goes generic.
Sales of Viread, which helped GILD greatly in its first growth spurt, are now a small part of its global sales. What may be more important than the direct sales of the new product could be making TDF appear to be inferior to the new product and therefore inappropriate to use in various all-generic regimens for HIV/AIDS.
So GILD has some real marketing challenges here.
In his JPM presentation, Dr. Milligan discussed GILD's other efforts in hep B. There's no transcript available, so I do not want to report from memory, but it's a growing early-stage and mid-stage effort. While hep B is more common globally than hep C, the latter is more important commercially.
3. Gilead Terminates Phase 2 Study of Simtuzumab in Patients With Idiopathic Pulmonary Fibrosis
More bad news on the pipeline here, though not all bad.
Simtuzumab is an antibody that GILD acquired a few years ago. It acts on an enzyme important for fibrosis development. Thus GILD tried to see if it would make cancers more accessible to chemo, by
"weakening" the extra-cellular matrix that protects cancers. This failed. Now we have learned that what is viewed as a primary fibrosing disease, IPF, cannot be treated with simtuzumab via an interim analysis of Phase 2 data.
The press release also says:
Separately, Phase 2 studies of simtuzumab are ongoing in patients with non-alcoholic steatohepatitis (NYSEARCA:NASH) and primary sclerosing cholangitis (PSC). The DMC for these studies also met and recommended the continuation of the studies, which have a 96-week endpoint.
This is not bad, but hardly proof of a positive effect.
In his presentation, Dr. Milligan revealed that GILD's efforts in NASH are moving along. The first of its portfolio of drugs from its Phenex acquisition is going to be entering Phase 1; that's a good sign but obviously very early and not worth anything to GILD's share price.
The repeated disappointments with simtuzumab are no surprise to the Street or to me, but again there's some hope for it in NASH and/or PSC. At this point, there's only upside for this drug except for the remaining modest cash costs of the clinical trials.
Before commenting further on GILD, I want to make a comment on ABBV. It has now made a regulatory filing based on Phase 2 data for its anti-WBC cancer drug venetoclax. This is being developed in conjunction with Genentech, a Roche (OTCQX:RHHBY) subsidiary. ABBV has been working diligently to diversify away from its dependence on Humira. I have been successfully trading ABBV after I got over my reaction to its litigation strategy against GILD's anti-HCV program, and bought it again Tuesday between $54 and 55. No guarantees, but I expect that its dividend is secure, and over time, the difference between its 4% dividend yield and GILD's 2% or so dividend yield makes a difference to retirees. I expect that ABBV will make a reasonable net profit over time from its HCV program; that Humira has an extremely large net present value; and that the competition from the development-stage AstraZeneca (NYSE:AZN)-Acerta BTK-inhibitor drug against Imbruvica will not destroy ABBV's investment in Imbruvica. ABBV has a broad pipeline that could work out well, and it may be a suitable holding especially for income-oriented investors.
In contrast, as Dr. Milligan disclosed at the JPM conference, GILD is going to need this year to really decide how to proceed in its oncology program. It would like to do with oral oncology drugs a version of its combination drug approach to HIV/AIDS and HCV, and certainly it's looking at next-generation candidates that it might acquire rights to. This is a critical area for the company, and visibility is unfortunately low.
GILD's stock price may have been affected by its prominence in the recurrent issue of drug pricing. It's worth discussing this next because of its potential business and stock market importance.
GILD at the center of the drug pricing controversy
It's been my thought that around and below $100/share, the entirety of GILD's market share was probably accounted for by its HCV and HIV/AIDS franchises. There are lots of risks therein, and at best it will take many years to know if that's so, but I can see ways that at its recent price range in the mid-to-high $90s, GILD could be worth more than that over time based on those two franchises. One of the things that has harmed its image is the unremitting focus on Sovaldi/Harvoni by critics of its pricing. No matter than Japan and Germany have socialized medical systems with government-dictated drug pricing, and have priced these drugs similar to that which the freer market in the US is now pricing them.
I've seen politicians and other critics of businesses come and go, sometimes with justice as with criticisms of cigarette companies in past years. My observation is that there are times when solid companies end up in the crosshairs of critics because they are being scapegoated precisely because they are prominent. Apple (NASDAQ:AAPL) and its Chinese labor practices a few years ago represented a classic example that ultimately was irrelevant to the stock, but it was not pleasant for the company or the stock on a headline basis.
In pricing Sovaldi/Harvoni, GILD appears to have acted legally, and its list prices provided cost-benefits compared with the prior standard of care. It first developed its own anti-HCV drug program and then spent $11 B while also incurring large interest and opportunity costs to acquire Sovaldi/sofosbuvir. For a company GILD's size at the time, this was close to a bet-the-company acquisition. None of today's critics would have given GILD a dime in charity if sofosbuvir had failed to work, or had been beaten out by its larger competitors, who at the time comprised a Who's Who of Big Pharma powerhouses. So it was normal to have wanted to make a big commercial success, and the company has said that it was surprised at the extent to which Sovalid became that success.
No pharma company can sell a drug to a customer who cannot or will not pay for it, so pricing is always "in line" in that sense. Technology always works this way. Large screen TVs that cost huge sums at first are now being sold for (relatively) peanuts. Eventually Sovaldi and Harvoni will go generic. Or to put it another way, as we are seeing now with crude oil, in a capitalist system, if one takes the (proper) longer view, the cure for high prices is high prices.
GILD is learning the same lesson that AAPL as well as Microsoft (NASDAQ:MSFT) have learned: pay more (lots of) attention to politicians. In the case of politically-charged matters such as drug costs, many of which are directly or indirectly subsidized by governments, it's naive at best and folly at worst to think that GILD is operating in an old-fashioned free market. Government has a legitimate place, and perhaps an early one, in this sort of situation.
From the standpoint of a stockholder, though, I do not foresee any major repercussions to its discounted future cash flows from this whole contretemps. Every company makes some mistakes, but in this case any mistakes were likely based on standard competitive considerations. I continue to view GILD as a corporate "good guy."
In this election year, while I'm no political analyst, broadly speaking I expect that the United States is not, not, not going to destroy or even seriously harm one of its most successful, growing industries, namely the biotech/biopharma industry of which GILD is perhaps the single leading example. GILD has probably done the most good for the most people globally of any pharma company this century via its HIV/AIDS and HCV non-profit programs for needy countries. It certainly will be pointing to this as it ramps up its discussions with all the power centers in Washington and the states as it explains and defends its pricing strategies.
These matters tend to pass, and often are buying opportunities.
It is possible that the ongoing roll-out of TAF-containing HIV/AIDS combo products and TAF instead of Viread, plus growth of the HCV franchise via Japanese growth and then global growth from SOF/VEL will allow GILD to beat consensus sales and EPS expectations for this year. That is at least my bias. Having developed two giant, powerful franchises, refreshed with industry-leading technologies, GILD is in a strong position to both reward shareholders with increasing dividends and shrinkage of the share count while developing new profit centers. When a company has a P/E of 9X, the P/E certainly can drop further (as can profits), so risks are clearly present to investors; but a mere 2 point increase in the P/E to 11X represents a 22% price change. I think this could happen this year, at least on a trading basis, along with earnings beats, so I remain optimistic on GILD. Often forgotten in last year's disappointing stock price performance is that GILD's average price in 2015 was higher than that for 2014, so in that sense it was a record year for the stock; i.e. a high-level consolidation.
I remain hopeful that some time this year, GILD announces deals for its HCV products as well as HIV/AIDS products to be marketed in important ex-US countries. Just one specific such deal, with China, could provide an important boost to the stock.
Beyond that, the company is already signaling that the Street should look to limited visible pipeline progress this year. While that's a negative, it may well be "in" the stock price. I'm optimistic that just as I liked the Galapagos (NASDAQ:GLPG) deal, GILD will execute one or more well-thought out acquisition or other transaction that will enhance its pipeline with an attractive risk-adjusted return on invested capital.
Thus I remain overweighted in GILD in the equity part of my portfolio. My bias would be to scale in further on weakness, tempered by my macro caution about US equities in general.
Disclosure: I am/we are long GILD,ABBV, AAPL.
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.
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