Previously I've written about why I consider Gilead Sciences (NASDAQ:GILD) one of America's most undervalued companies, and an excellent long-term dividend growth stock — one I happily own myself.
A big part of that thesis is based on the fact that Gilead's massive river of free cash flow comes from two main sources: dominant drug platforms in both HCV and HIV.
And while HCV blockbusters such as Harvoni and Sovaldi may have peaked, up and coming blockbusters such as Epclusa mean that the company's HCV business should soon stabilize, and even potentially resume growing.
In the mean time Gilead's legendary HIV business, including several new, and up and coming drugs, should mean many more years of stable, and growing cash flow with which to fund its strong development pipeline, buyback the cheapest shares in biotech, and grow the dividend at a good clip.
Now however, comes word from England about a potential game changing, thesis busting new drug treatment that could prove to be Gilead's undoing. Find out what this doomsday drug is, what it could mean for Gilead's bottom line. But most importantly of all, why it's much too early for Gilead investors to panic, sell, and head for the hills.
A potential cure for HIV would be a miracle for mankind...
Currently there are an estimated 37 million people worldwide living with HIV, the virus responsible for AIDS. Without treatment the virus is assured to eventually wipe out a patient's immune system, and kill him/her from secondary opportunistic infections.
However, thanks to antiretroviral, or ARV therapies, such as Gilead's Viread and Truvada, 13.5 million people around the world are able to keep the virus at undetectable levels; allowing them to live normal, healthy, and normally long-lived lives.
However, the problem for patients is that these treatments must be continued every day for the rest of their lives. And these miracle drugs don't come cheap. For example, even those with insurance must pay $300 per month for Viread, and Truvada's cost (without insurance) runs $1,300 per month, or $13,000 per year. Thus a potential permanent cure for the virus would prove one of the greatest medical triumphs in all of human history, and save the world's health systems billions a year in drug costs.
Recently British doctors revealed that a 44 year old man who's part of a 50 patient, experimental treatment to completely rid the body of HIV appears to have been cured.
The treatment involves giving the patient a vaccine to wake up dormant CD4 T-cells in which HIV can remain dormant, and hidden for years. Then Merck's (NYSE:MRK) Vorinostat is used to kill all the infected cells, theoretically completely clearing the body of the virus.
According to Mark Samuels, managing Director of the NIH's Health Research Office for Clinical Research Infrastructure, "This is one of the first serious attempts at a full cure for HIV."
... but a thesis-killer for Gilead
Gilead holds the lion's share of the HIV market, with about 75% of all ARV patients on its medication regimens. Which explains why HIV is such an important franchise to company; responsible for $3.12 billion in sales in the 2nd quarter of 2016.
That's up 15% from last year, providing a blessed relief from the Gilead's falling HCV sales. That's thanks to three strong new drugs: Genvoya, approved last November, and Odesfey, and Descovy, which are designed to offset older HIV drugs that are soon going off patent.
Meanwhile, Gilead continues to innovate, with plans for filing for final FDA approval for Bictegravir in mid 2017.
This is how Gilead plans to remain on top of a highly lucrative, and recurring revenue stream that is currently generating annual run rates of $12.5 billion a year.
The importance of this business line can't be understated, since Gilead is counting on its recently approved omni-genotype HCV drug Epclusa, which analysts expect to generate as much as $10 billion in annual sales, to offset its falling market share in Harvoni, and Sovaldi sales.
In other words, HIV is the stable cash cow that allows Gilead to continue funding its strong pipeline, likely grow sales in the future, buy back super cheap shares, and most importantly to dividend investors like myself; secure, and grow the payout.
Why you should stay calm and carry on
While it goes without saying that a miracle cure for HIV could prove devastating to Gilead's underlying business model, as well as trigger further declines in its shares, it's very important for investors to avoid buying into the media driven hype of this potential cure.
For example, according to Stephen Morse, epidemiologist and director of the Center for Public Health Preparedness at Columbia University, "there has been such a history of false optimism and false hope with HIV that you wonder why announcements such as this like are made."
What Doctor Morse means is that it's way too early to start popping champagne. That's for three main reasons. First, the size of this initial phase II trial is very small, with just 50 patients.
Second, the trial has just begun, scheduled to not be complete until December of 2017, and official findings to be published in 2018. And even then it won't be until several more years until researchers can actually confirm this treatment really is a permanent cure for the virus; even if all 50 patients respond with equally good results.
That's because HIV is a real bear of a virus to eradicate, capable of lying dormant within CD4 T-cells for years before randomly re-emerging and restarting a patient's infection.
In other words, even once the trial's initial phase is complete, researchers plan to follow each patient for five years, retesting them periodically to confirm that virus has truly been eradicated from the body.
Finally, this is far from the first alleged cure for HIV. For example, back in 2012 a baby in Mississippi was thought to have been cured of the virus, but relapsed after 27 months without ARV treatment.
In fact the only confirmed case of any human ever being permanently cured of HIV is Timothy Brown, aka "the Berlin patient", who was cured of the virus in 2006 after undergoing a most extreme form of experimental treatment for his acute Myeloid Leukemia.
Specifically, Brown's doctors gave him full body irradiation, and chemotherapy to wipe out his immune system, and thus kill off the reservoir for the virus. Next he received not one, but two bone marrow transplants, so his body could once more create red and white blood cells.
One of those bone marrow transplants was from a person with a genetic immunity from HIV, courtesy of descending from survivors of the black plague. Specifically, 10% of Europeans today are believed to carry a mutation in the CCR5 gene, which alters the surface protein on CD4 T-cells that HIV requires to infect the cell.
The mutation is believed to have become so prevalent in Europeans due to either repeated outbreaks of plague and or smallpox that devastate Europe from the 1300's to the 1600's. This is thanks to the mutation giving a higher likelihood of surviving these diseases.
In this case, Brown's doctors looked for someone with a known CCR5 mutation in the hopes that the CD4 T-cells the new marrow would generate would prove immune from any virus that may have survived the radiation, and chemotherapy.
Of course, with a sample size of one, the lone "cured" HIV patient's example is far from a proven cure for others. For one thing, researchers would need to attempt hundreds or even thousands of other trials with similar patients.
And even if this extreme, and monstrously expensive therapy proved effective, it would almost certainly prove far too costly, and impractical to serve as a cure for the 37 million people infected with HIV today.
Bottom line: Miracle cures that make cash cows obsolete are inherent risks in biotech
Don't get me wrong, I'm not saying I hope this potential HIV cure fails, despite the fact that it would be a major win for Merck, and a potentially thesis-destroying nuclear bomb for Gilead.
However, medical innovations that make a biotech/pharmaceuticals existing products obsolete are simply one of the risks that one takes when investing in this industry.
Which is why it's so important to be highly selective with which companies you buy, specifically choosing those with strong pipelines, and solid, well proven management teams. The kind that can adapt to game changing potential medical miracles such as this.
Disclosure: I am/we are 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.