Gilead Sciences, Inc on Its Way to Dominating Its Second Multibillion-Dollar Market

Gilead is in the early stages of conquering its second huge market.

Feb 20, 2014 at 6:30PM

It's rare enough for a biotech to succeed, and even rarer for a biotech to ultimately dominate a therapeutic area. But to do it twice? That's almost unheard of, and yet here we are with Gilead Sciences (NASDAQ:GILD). Building off of a $9 billion franchise in HIV, Gilead is set to become the leader in the emerging multibillion-dollar hepatitis C (HCV) market. Odd as it may seem given the 270% run in these shares over the last two years, there may yet be value left in these shares.

Sovaldi off to a good start
Gilead is only in its very early stages with its HCV franchise, but the sales of its lead drug Sovaldi have been strong. Fourth quarter sales were about 85% higher than the Street expected, though much of the beat was due to inventory stocking. Even so, prescriptions continue to grow at a 25% week-over-week clip, blowing away the prior track record of the last meaningful step forward in HCV, Vertex's Incivek.

AbbVie will be competitive, but a lot comes down to pricing
In the mad dash to compete in the market for next-gen HCV treatments, a lot of would-be competitors have fallen by the wayside due to inadequate efficacy or unacceptable safety issues. AbbVie (NYSE:ABBV) has emerged as a valid and viable contender with its all-oral regimen.

AbbVie's Phase III studies of ABT-450 (w/ritonavir), ABT-267, and ABT-333 showed the requisite efficacy, with SVR12 rates of 90% to 100% in GT1a and GT1b patients, including treatment-naive, treatment-experienced, and those with cirrhosis. The details matter, though, as GT1a SVR12 results were only 90% without ribavirin and the Turquoise-II study saw 6% viral relapse, while the Pearl-IV saw a 8% relapse in the ribavirin-free group. It's also worth remembering that the AbbVie dosing schedule isn't as convenient – Gilead patients taking the Sovaldi/ledipasvir combo take one pill, once a day, while AbbVie patients take six pills twice a day.

Gilead has talked about targeting 80% to 90% market share in HCV, and many analysts have gone along with that. I believe that is probably too aggressive. The AbbVie results weren't perfect, but they were pretty good – good enough, I believe, that even modest discounts to the Sovaldi price ($84,000 a year) could lead to 20% to 30% share. Seeing as the cost of production will likely be less than $1,000, I believe AbbVie will be willing to be flexible on pricing if that's what it takes to build share.

Will others make a difference?
The SVR12 rates reported by Gilead and AbbVie have been very, very good, and that sets a very high bar for would-be competitors. Merck (NYSE:MRK) and Bristol-Myers (NYSE:BMY) are both likely to give it a try, though.

A small study of Merck's combo (MK-5172/MK-8742) showed a 100% SVR12 in treatment-naive GT1b patients without ribavirin. In a different study segment that included ribavirin and a 70/30 mix of GT1a and GT1b patients, the SVR12 was 96%. While the need for ribavirin would be a definite drawback compared to Gilead's combo, the dosing (two pills, once a day) would likely make it a commercially viable combination.

For Bristol-Myers, it's all about combining forces with Gilead. Bristol-Myers has had some huge setbacks with the compounds it acquired in the Inhibitex deal, but the company's NS5A inhibitor daclatasvir could be a potent partner to Gilead's Sovaldi. Early stage studies have shown 100% SVRs in patients who've already failed Incivek and Victrelis, and this combo also appears effective in genotype 3 patients, which is more common outside of the U.S. Gilead is doing nothing to cooperate with Bristol-Myers on this combo, but there is at least an outside chance that this will be a meaningful product for Bristol-Myers.

But wait, there's more
If Gilead was "only" a dominant player in HIV and HCV, that would still likely mean over $16 billion in revenue in 2020. There is more to this story, though, as Gilead has been building up a pipeline in oncology, cardiovascular, and other therapeutic areas. There are some questions about how lead drugs idelalisib and simtuzumab will fare in terms of efficacy and tolerability, but Gilead may well have some additional $1 billion-plus drugs in this relatively new oncology pipeline.

The bottom line
Expectations are huge for Gilead, but the company may still yet have room to run. Strong established market share in HIV will generate significant cash flows, and there is a credible case that the introduction of new HCV combos will increase the patient population as more people seek out testing and treatment. With that, I'm willing to project 12% long-term revenue growth for Gilead, with FCF growth approaching 20%. 

Discounting that back, I come up with a fair value of over $86 for Gilead today. Certainly there are risks that rivals like AbbVie and Merck will get more share of the HCV market than expected, as well as risks that there aren't as many HCV patients as believed and that payers push back on pricing. All things considered, though, Gilead still looks like a stock with some room to outperform.

Why a Fool is putting $117,238 behind this 1 stock
Biotech investors know that opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

Stephen D. Simpson, CFA has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers