Gilead Sciences (GILD), the Foster City CA biopharmaceutical behemoth, recently entered the oncology market with the FDA approval of its first cancer drug Zydelig (Idelalisib) in July and in Europe in late September. The drug, to be used in combination with Roche's (RHHBY) Rituxan, was approved for the treatment of relapsed chronic lymphocytic leukemia, relapsed follicular lymphoma and relapsed small lymphocytic lymphoma. The approval of this therapy is important because it represents Gilead's foray beyond the anti-viral space, and the cancer market offers huge revenue potential. The company currently has nine oncology candidates in the pipeline, including two for Idelalisib which are in phase three clinical trials. Of course, Gilead's primary source of revenue is its hepatitis and HIV therapies, but the company is not resting on its laurels, nor is it content with only focusing on the anti-viral markets. With many of its HIV blockbusters losing exclusivity by 2021, as well as competitive concerns in the Hep C space, Zydelig represents an important step towards diversification for Gilead.
I believe the market is overlooking the potential of Zydelig, as well as Gilead's oncology pipeline in general. Sovaldi/Harvoni are getting all of the attention, both positive and negative, and it seems the market is ignoring the significant value in Gilead's other drugs. The stock remains grossly undervalued, and I believe shares will trade north of $150 by year-end 2015.
CLL, SLL, FL and Potential Market
The most prevalent blood cancer. Lymphoma is classified as either Hodgkin lymphoma and non-Hodgkin lymphoma (NHL). The Lymphoma Research Foundation explains:
Lymphoma occurs when cells of the immune system called lymphocytes, a type of white blood cell, grow and multiply uncontrollably. Chronic lymphocytic leukemia (CLL) and small lymphocytic lymphoma (SLL) are B-cell lymphomas.
The location of the cancer determines whether the disease is classified as CLL or SLL. CLL is located in the bloodstream and the bone marrow, but often the cancer is also found in the lymph nodes and spleen. When the cancer cells are located primarily in the lymph nodes, the disease is diagnosed as SLL. The most prevalent form of indolent, or slow-growing NHL is Follicular lymphoma (FL), which is a B-cell lymphoma. Approximately 20 to 30 percent of all NHL cases are FL. Zydelig is approved for the treatment of relapsed CLL, SLL and FL in the U.S. and it is approved for relapsed CLL and FL in the EU.
The American Cancer Society estimates 15,720 new cases of CLL occurred in the US in 2014 with 4,600 deaths from the disease. More than 200,000 people suffer from these three blood cancers in the US alone. The research and consulting firm Global Data estimates the CLL treatment market alone to grow from $1.4 billion in 2013 to $3.3 billion by 2018 across six major markets including the USA, France, Germany, Italy, Spain and the UK.
Zydelig's Third Quarter Performance and Outlook
Zydelig was approved in the US on July 23, 2014, so the sales numbers are only for a partial quarter. From this date through September 30th, the drug garnered $4.9 million in revenue, with atotal of 350 patients treated. The European Commission approved Zydelig on September 19, 2014. During those 11 days of availability, sales were approximately $1million. If we extrapolate these numbers to account for a 90 day quarter, this equates to roughly $14.7 million in revenue. Assuming no growth, this would equate to approximately $59 million in sales per quarter. Many analysts, however, do expect Zydelig to capture a significant slice of this market. Bernstein's Geoff Porges expects Zydelig sales to reach $1.5 billion by 2017. Morningstar's Karen Andersen predicts that Zydelig's sales will eventually reach $3 billion.
The competition in this segment of the oncology market is quite fierce. Johnson & Johnson (JNJ) and Pharmacyclics (PCYC) won FDA approval of Imbruvica in February for the treatment of CLL. The drug had already been approved in November of 2012 for mantle cell leukemia. Imbruvica can be prescribed in patients who have receivedat least one systemic therapy. Genentech's Gazyva, which won FDA approval in November 2013, is a frontline treatment for CLL. Patients who do not respond to Gazyva could then be prescribed Imbruvica. Zydelig is at a competitive disadvantage in this regard; the Zydelig/Rituxan regimen can only be used after patients have received two previous systemic treatments. It is rare, however, for CLL not to recur after initial treatment and remission, and this is Zydelig's target market.
The primary reason that Zydelig is a "third line" treatment is not due to efficacy but rather to the serious side-effects associated with the therapy. The drug carries a black box warning required by the FDA. The warning highlights potentially fatal liver problems, colitis, lung inflammation, severe diarrhea and even perforation of the intestine. The warning states "Fatal and/or serious hepatotoxicity occurred in 14% of Zydelig-treated patients. Fatal and/or serious and severe diarrhea or colitis occurred in 14% of Zydelig-treated patients." Imbruvica or Gazyva do not have black box warnings, which is another competitive disadvantage. With that said, for patients who experience relapses, Zydelig offers not only hope, but also realclinical benefits. In clinical trials, the Zydelig/Rituxan combination resulted in 10.7 months of progression free survival compared to 5.5 months with Rituxan alone. The overall response rate to the regimen was 81% versus 13% with Rituxan. Finally, 93% of patients were progression free at 24 weeks, which is almost double the result of Rituxan alone.
Phase Three Clinical Trials
Currently, Idelalisib is being studied in stage three clinical trials as a frontline therapy for CLL. In addition, Gilead plans to initiate a phase 2 study for Idelalisib for use in frontline indolent Non-Hodgkins Lymphoma (iNHL) in the fourth quarter of 2014. Approval as a frontline CLL therapy would allow Zydelig to compete head to head with Gazyva, although Gazyva has fewer and less severe side effects. If Zydelig is approved as a frontline treatment for iNHL, then Gilead will compete for the FL frontline market, since FL is the most common form of iNHL.
Zydelig will likely become a significant source of revenue for Gilead, and represents a critical entre into the lucrative oncology market. The Chronic Lymphocytic Leukemia market alone is projected to reach $3.3 billion across six major markets, which represents sizeable revenue potential for Gilead. Although Zydelig was available for only a portion of the third quarter, it performed well. The drug is most likely only the beginning for Gilead in the oncology space. During the third quarter conference call, Chairman and CEO John Martin stated "Zydelig is the first to what we hope will be many therapies Gilead develops to improve treatment for a range of cancers." Zydelig is further proof that Gilead's stock continues to be undervalued, and I believe the company's consistent innovation and strategic acquisitions will propel the stock to at least $150 within one year.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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