At a recent healthcare conference, Gilead Sciences (NASDAQ:GILD) CEO John Milligan laid out his top three priorities for 2018. Here's what he said (this and all other quotes courtesy of S&P Market Intelligence):
[The] B/F/TAF launch is very important for us. Executing on CAR-T is incredibly important for us. And then it's making sure that we get the NASH [nonalcoholic steatohepatitis] drugs moving forward as quickly as possible so that we can be the leader in NASH. Those are my three priorities for the coming year.
Milligan didn't even mention Gilead's hepatitis C franchise, which is on track to provide the company between $8.5 billion and $9 billion in revenue for full-year 2017.
It's not like $8.5 billion isn't a lot of money to Gilead -- it is. In fact, it represents about one-third of Gilead's total anticipated revenue this fiscal year. No, there's a simple reason that Dr. Milligan didn't mention hepatitis C as a priority for next year: There's no real growth opportunity left.
A launch unlike any other
Most drug ramp-ups follow the same pattern: gradual uptake in a crescendo that peaks several years after initial introduction. Due to the fact that Gilead's hepatitis C virus (HCV) drugs represented a step change in treatment (from disease management in many cases to a cure in almost all), its drug sales marched to a different tune:
|Hepatitis C Drug||2013||2014||2015||2016||2017 (first nine months)|
|Sovaldi||$139.4 million||$10.3 billion||$5.3 billion||$4.0 billion||$847 million|
|Harvoni||$2.1 billion||$13.9 billion||$9.1 billion||$3.7 billion|
|Epclusa||$1.8 billion||$2.9 billion|
|Total||$139.4 million||$12.4 billion||$19.2 billion||$14.9 billion||$7.4 billion|
The sickest patients clamored to take Gilead's drugs as soon as they were available and got cured, as evidenced by the incredible uptake in Sovaldi and Harvoni in their first full year on the market (2014 for Sovaldi, 2015 for Harvoni). So, to keep selling its drugs, Gilead had to seek out healthier patients, with a less-urgent need for treatment. That, combined with competition from drugs marketed by AbbVie and Merck, lowered prices and reduced the market size and opportunity over time.
People getting cured of a liver-ravaging disease at lower and lower prices is undeniably a good thing -- and though Gilead's profits have been dented by the tail-off of its HCV sales, management has never expressed any regrets. Particularly because it has used all of that extra cash to fund its next opportunities, which Milligan succinctly highlighted in the quote I referenced above. So let's turn to what Gilead's management views as the company's future.
Building off past expertise
The first drug that Milligan referenced was B/F/TAF, a combination drug designed to continue the next-generation development of Gilead's HIV portfolio. HIV drugs produce the vast majority of Gilead's non-HCV sales, as Gilead controls 79% of the U.S. HIV market and also markets the No. 1 drug for treatment-naive HIV patients in Europe. Gilead has been rolling out TAF-based regimens, which reduce some of the side effects of its earlier HIV cocktails, to convert patients away from older drugs that are soon to see their patents expire. B/F/TAF represents the pinnacle of that effort to switch patients and further bolster Gilead's impressive market share. So far, it has a profile living up to its billing, with Milligan describing it this way:
So we have great confidence in the profile of B/F/TAF as being a regimen without any compromises. As a physician and as a patient, you don't have to compromise anything. It's a small tablet. All the products are very well tolerated. It's very potent. It's very forgiving.
B/F/TAF's PDUFA date is set for Feb. 12, 2018. Gilead has also filed for approval of the combination therapy in Europe. Once the drug is launched, Gilead's opportunity next year will be in execution and switching patients from other regimens. That is undoubtedly what's on Milligan's mind.
$11.9 billion buys... what?
The second priority Milligan referenced was the CAR-T portfolio and expertise Gilead acquired when it bought Kite Pharma for $11.9 billion earlier this year. The FDA affirmed the wisdom of Gilead's choice in October by approving Kite's lead CAR-T drug, Yescarta, to treat non-Hodgkin lymphoma. With analysts estimating peak annual sales at over $2 billion for the drug, there's plenty of reason for Milligan to be focused on a successful marketing launch. But if he were focused strictly on the launch -- or even on clinical data for additional indications for the drug -- he would have just said that Yescarta was a priority.
Instead, he noted that his focus was on "executing on CAR-T." And that highlights Gilead's real reason for buying Kite: Management believes it has bought a platform that can spin up all kinds of cancer drugs. Kite has several other drugs in early-stage clinical trials across a number of indications, and if they pan out, the price Gilead paid for Kite will be dwarfed by incoming profits.
Milligan recently explained exactly how he's thinking about CAR-T:
So number one, you've got to improve manufacturing. And manufacturing, by the way, may be a helpful way to improve the performance of the CAR-Ts, by adding in different components. Number two is making the CD19 CAR-T program better with the next generation... And then the third area, I'll put into a bigger bucket, which is new targets, including solid tumors.
Milligan is likely already laying the groundwork to attack all three major CAR-T opportunities -- and I suspect it's this expanded playing field to which he's referring when he talks about executing on CAR-T.
Alone or in combination?
The third opportunity Milligan highlighted was in nonalcoholic steatohepatitis (NASH), a liver disease characterized by a buildup of fatty tissue and scarring that can lead to cirrhosis. Gilead is pursuing three different drugs to treat NASH: ACC inhibitor GS-0976, ASK1 inhibitor selonsertib, and selective nonsteroidal FXR agonist GS-9674. The company recently presented data showing that GS-0976 reduced both fatty tissue and a biomarker for fibrosis -- results that, if they are replicated in larger-scale trials, could be very good news for the drug's chances.
NASH offers an incredible opportunity if Gilead can figure out how to treat it. It's estaimated that between 3% and 12% of U.S. adults have NASH, and analysts have pegged potential NASH treatments' peak sales as high as $12 billion a year. But it hasn't been an easy road: Last year, Gilead ended studies of its NASH hopeful simtuzumab after the drug put up disappointing results.
But Gilead hasn't exhausted the possibilities, and it is currently studying its three NASH drugs in combination with each other to see whether there are any synergies. Next year, with data in hand, management will decide whether to authorize expensive, larger-scale trials to pursue the combination route. Making the right educated guess for pursuing NASH is undoubtedly high on Milligan's priority list.
HCV has provided Gilead with a ton of cash (and likely will for some years), which has opened up tremendous opportunities for the company. But it's good that management is focusing on new ideas, instead of trying to squeeze every last drop out of the HCV franchise. That's the sort of forward-looking, thoughtful strategy that I want in a management team, and it's why I remain a very optimistic Gilead shareholder.