No Balm of Gilead Today (Fool on the Hill) November 2, 1999

An Investment Opinion

No Balm of Gilead Today

By Warren Gump (TMF Gump)
November 2, 1999

The stock of biotech company Gilead Sciences (Nasdaq: GILD) took a 22% plunge today after a Food & Drug Administration (FDA) advisory panel recommended that the agency not approve the company's Adefovir drug for the treatment of HIV. In a 13-1 vote, the panel of experts concluded that data submitted in the new drug application wasn't sufficient to support the safety or efficacy of the drug.

Analysts knew that Adefovir wouldn't have an easy ride through the approval process because of the high incidence of kidney damage, but most expected the drug ultimately to be approved because it seemed to help some patients who haven't responded to other treatments. In the end, however, the panelists determined that information gathered in clinical trials didn't clearly show that the benefits of Adefovir outweighed its health risks. This is the first time that an FDA panel has not endorsed an HIV drug. The FDA usually follows the recommendations of its expert panels, although it isn't required to do so.

Several factors explain the swift market reaction to the FDA panel decision. With analysts expecting Adefovir to be approved and put on the market, they had incorporated sales from the drug in their models. The elimination of these sales will significantly increase loss estimates over the next couple of years. One analyst said it could delay Gilead's turn to profitability by up to a year.

The decision also raises questions about the end result of Gilead's efforts to use Adefovir as a treatment for chronic Hepatitis B. With the company in the midst of Phase III testing (the final stage before submitting a new drug application to the FDA) for the drug against this disease, analysts and investors were optimistic that the drug might be approved for multiple uses. Those hopes have been diminished with the FDA raising concerns about the drug's safety. (Adefovir will be used at a different dose against Hepatitis B, so there is a chance that the safety problems will not be as pronounced in these trials.)

Investors are worried about even more negative ramifications from yesterday's announcement. (When a company announces bad news, investors start looking at the glass as being half empty rather than being half full.) Another drug in Gilead's pipeline is a second-generation HIV treatment called Tenofovir, on which it is preparing to start Phase III trials. With Adefovir assumed to be rejected, investors are now concerned that Gilead management won't be able to obtain approval for this drug.

As a reality check, Gilead shareholders own more than the prospects of one or two developmental drugs. The company acquired AmBisome, an injectable drug that fights fungal infections with estimated sales of over $100 million this year, through its acquisition of NeXstar pharmaceuticals earlier in the year. In addition, Hoffman-LaRoche just received FDA approval a week ago for the launch of Tamiflu, a drug that will be used for the treatment of the flu. Gilead helped develop this drug and will receive royalties off of Roche's sales. The company also has several other drugs in its research pipeline. Further information about these compounds can be picked up from Gilead's website.

Despite the Adefovir setback, Gilead has plenty of resources to continue pursuing its research agenda. At the end of September, it had $307 million in cash and equivalents at the end of September. That's enough money to fund operations for at least three years at its current cash burn rate. While having enough cash is an important step, the make or break proposition for any drug company is getting a compound approved for marketing.

Considering that PhDs in chemistry, biology, and genetics can't figure out whether the FDA will approve a drug, how is a common Fool supposed to accomplish the same task? In my opinion, they can't. The drug approval process is filled with too many twists, turns, and potholes for most people to accurately gauge what will happen.

Unless you have access to someone who knows and understands the therapies being researched, you're basically playing craps when investing in a company because of one drug in its pipeline. That's not to say you won't win -- and possibly win big, but you've got to prepared for lots of disappointments along the way to success. Only a small portion of tested drugs are ultimately approved by the FDA and regulators in other countries.