Waning demand for Gilead Sciences' (NASDAQ:GILD) once-revolutionary hepatitis C drugs has made it one of biopharma's worst performers since 2015, and demand isn't going to improve anytime soon. Should Gilead Sciences shareholders throw the towel, or is this a beat-up bargain that's worth buying?

In this episode of Industry Focus: Healthcare, host Kristine Harjes and Motley Fool contributor Todd Campbell discuss Gilead's past and the research and development programs it hopes will rekindle investors' optimism in the future.

A full transcript follows the video.

This video was recorded on June 6, 2018.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is June 6th, and this is the Wednesday Healthcare edition of the show. I'm your host, Kristine Harjes, and I have healthcare specialist Todd Campbell on the line. Welcome to the show, Todd!

Todd Campbell: Hi, Kristine! It's going to be an interesting show today for listeners, because we're going to be talking about probably one of the toughest things for investors to do, which is sticking with stocks when they stumble, right?

Harjes: Absolutely. Earlier today, I had a great conversation with Jeff Fischer, who is the lead advisor on Motley Fool Pro. We were talking about big biotech today. In particular, he made this really good comparison to big pharma a couple of decades ago, where these stocks had been darlings for so long until the patent cliff walloped them and newer treatments came out, and the stocks completely fell out of favor. 

Now, 20 years later, it kind of looks like the market is getting the same sort of view of big biotech. Some of the companies that we talk about the most on this show have gotten clobbered. In particular, we get questions all the time about Gilead Sciences and Celgene (NASDAQ:CELG), which are two stocks that we talk about a ton on Industry Focus, and I know a lot of listeners hold in their portfolios, but they've been such poor performers over the last few years. So, today, we're going to tackle the question of why have they declined so much, and also, what do we expect going forward for them?

Campbell: This is a topic that I'm sure is going to be interesting to a lot of our listeners. It's also interesting to me, and I don't know, maybe to you, Kristine. I actually own both of these companies in my own retirement account, and I am, sadly, down on both of them. I'm down about 18% on Gilead, and I'm about 28% down on Celgene. And one of the things that people always end up asking me, and they probably ask you, too, Kristine, is, "What do I do with this stock I'm down on?" And you have to go back and understand why it fell, what your catalyst or the reason behind you buying it in the first place was, whether or not that still remains intact, and then, what it is that's coming down in the future that could maybe get these stocks back on track. So, I think this is an important show. How do we want to start, Kristine? Do you want to just dive into Gilead? How do you want to approach it?

Harjes: Sure, let's do Gilead first. I'm in the same boat as you, Todd. I don't know if we bought around the same time. I think the first time I bought Gilead Sciences was right around when Sovaldi was first approved, so I'm also down about 20% on the position. There was a lot of hype about this stock's hepatitis C franchise, starting with that first approval of Sovaldi a few years back. Basically, it was kind of boom and bust. These drugs skyrocketed and sold billions and billions of dollars' worth, and then, just as quickly, they dropped off a cliff. I think the lingering question now with this company is, have hepatitis C sales stabilized? We'll provide some more context around that. I think that's question No. 1. Question No. 2, what else do they have going on? This is a company that really made its name in HIV before it ever had any HCV drugs. So, how is that franchise doing? Can we still count on it? Also, what other newer growth opportunities do they have?

So, laying out that structure, we'll talk HCV, HIV, and then new growth opportunities. Sounds good?

Campbell: Yeah. They're a victim of their own success. The launch of Sovaldi in early 2014, followed up by Harvoni later on that year, I think it was October, those were game-changing drugs. You took an indication that was a major cause of life-threatening liver disease and you provided a functional cure for the first time for patients. That was just revolutionary. Fantastic science. Of course, there were so many people. It's a very, very prevalent disease. And there were so many people with advanced cases of that disease that were just waiting for this revolutionary new treatment to launch that sales roared out of the gate. It didn't hurt that these were expensive drugs, either, right, Kristine?

Harjes: Yeah, absolutely.

Campbell: These things launched with $80,000-plus price tags for a 12-week course of treatment. I think it was $1,000 a pill when Sovaldi was launched. Combine a high price with crazy good efficacy and a huge patient population, it's little wonder that, at one point, the HCV franchise was bringing in sales at about a $20 billion annualized clip. To put the sheer size of that market opportunity in perspective, if you annualize the sales that Gilead Sciences just reported in the first quarter, it's about $20 billion. That just goes to show you how much hepatitis C sales have fallen off over the last few years. I think, Kristine, you probably agree with me that there are a few different things that are going on and contributing to that. You have more competition, which, of course, has created a price war, but you also have a scenario where you have fewer late-stage patients to treat -- your addressable market, because your drug's so effective, has shrunk.

Harjes: It's important to recognize that that is a good thing, that last statement there, that the patient population is shrinking because people are being cured. That's amazing from a human perspective. But when you look at the business, it also leads to declining sales. Plus, when you add in competition, primarily from AbbVie (NYSE:ABBV), for example, AbbVie just released a drug called Mavyret, which is the first treatment that treats all different types of hepatitis C. Previously, you had different drugs for the different genotypes. And, it only takes eight weeks, as opposed to the prior standard of care from Gilead Sciences, Epclusa, which was a 12-week treatment. It's kind of a no-brainer that people would prefer the eight weeks. 

These companies have gone back and forth about who has the better drug that can treat more people with greater efficacy -- well, actually, they're all incredibly effective, but, with a shorter treatment duration. But, when it comes down to it, when you look at the numbers, this franchise has been on the decline for a while now. Right now, they're looking at about a $4 billion 2018 sales rate just for those HCV drugs. In the first quarter, they brought in $1 billion, so they're on track for that projection. But that $1 billion was down 59% year over year. And that's not the first time that we've seen these sales go down. 

Quarter after quarter, I keep hearing analysts, and even management, say that the stabilization is coming soon. The big question is, where exactly are these sales going to stabilize? It's my impression that AbbVie is going to continue to innovate, Gilead's going to continue to compete on price, and all the while, they're going to be curing more and more people and having to reach out to patient populations that are either harder to reach, or that don't have as advanced stages of the disease, and so it might be harder for these folks to get insurance coverage. I think it's only going to get harder for them. So, that's a big question mark for me. I don't know where exactly this bottom floor line will be.

Campbell: I read an article earlier this year that actually raised the question, did Gilead Sciences make a mistake in deciding to shelve any additional R&D into this indication? For example, trying to drive treatment duration down to, say, four weeks, or two weeks, or one dose and you're done. Maybe. Mavyret seems to be the best drug on the market in the indication right now, as evidenced by the fact that it's raking in a couple of billion in sales, and the hepatitis C market share is shifting away from Gilead Sciences to AbbVie. And I don't think that that's going to change. You have a smaller addressable patient pool. Now, make no mistake, $4 billion in annualized sales, I mean, most biotech companies would love to have products raking in $4 billion in sales. But, again, it's the rate of change that's been the concern for investors. 

And there's really no evidence yet in 2018 -- going back to the question you asked at the top of the show, is this going to be the year where we finally get that (unclear 9:02), where we can say, "OK, we're going to get better from here. We're at least stabilizing. And maybe, as additional new patients are diagnosed with the disease, then we can at least maintain where we are today, maybe grow a little bit." I don't think you can say that yet with Gilead Sciences. And that's going to put a lot of pressure on the other parts of its business, the HIV business and, thanks to their acquisition last year of Kite Pharma, their gene therapy business.

Harjes: Absolutely. Let's talk about HIV a little bit. Currently, Gilead is in the process of switching over the patients that are on their medications from these cocktail regimens that contain an older drug called TDF to a newer one that has similar efficacy but a better side effect profile called TAF. In February, they launched a TAF combination therapy called Biktarvy that is projected to be the best-selling new drug to reach the market this entire year. This is something that, management of Gilead Sciences has said it will be its best drug ever. It's been referred to as Gilead's Mount Everest. So, a ton of excitement about Biktarvy. But right now, it kind of looks like that switch from TDF to TAF has been about net neutral, where the HIV segment as a whole has been roughly flat with sales.

Campbell: What they've been able to do is innovate new therapies that reduce patient burden. HIV has become much more of a chronic disease than it was in the past in large part due to Gilead Sciences' drugs that it's launched in the past. So, turning it into a chronic disease, the next step then was to say, "OK, how can we reduce patient burden and make these drugs safer?"

One of the ways that they've done that is being able to take the various drugs that they'd developed as individual medicines and combine them together into single-tablet regimens. These single-tablet regimens really have been what's driving HIV sales and maintaining their market share over the course of the last three years or so. As you mentioned, the reformulation of the drug Viread into TAF, and then reformulating all of their combination therapies so that they include TAF instead of that older drug. 

What you're seeing now with the launch of Biktarvy earlier this year is, OK, we feel like, we have a certain number of patients, obviously, that are being treated for HIV. And those patients are being treated chronically. There are some other competitors out there in the space, and we have to make sure that we're still innovating to maintain our market share there. And that's what these drugs are doing. 

Biktarvy, though, isn't necessarily just going to be winning away market share from those other competitors, though. It's also going to be winning away market share from its existing drugs. Every time you make a pill that's smaller and easier to take, or that has the same efficacy but it actually has a better safety profile, you're not just going to win away business from other people, you're going to actually cannibalize your own sales. And that's kind of where they're at right now, and what they're projecting going forward. 

I think they're still saying that HIV is going to be a growth franchise for them, but it wouldn't be right, I don't think, to expect that that growth franchise is going to produce anything more than single-digit growth, maybe low double-digit, over the course of the next couple of years, anyway.

Harjes: Right. And that cannibalization is something that we also saw going back to hepatitis C. This past quarter, Sovaldi, which was the first of Gilead Sciences' HCV drugs to be approved, didn't even get its own line item in Gilead's latest quarterly report. That's because they innovated, they came up with better and better and better still drugs, which caused the older drug to not be used as much. 

Anyway, one growth opportunity that I do want to point out in HIV, before we move on to the other growth opportunities for Gilead, is in PrEP, which is for prevention of HIV. Truvada, right now, is being used for PrEP. There are about 167,000 people currently on it. But, there's a lot of attention being put on this that they could potentially reach many, many more patients who are at risk of HIV and get them on these drugs, potentially even moving over to a TAF-based cocktail, such as Descovy, for PrEP. According to management itself, this could be just as important within the HIV segment as treatment of patients that actively have the disease itself. That's pretty huge. It remains to be seen whether or not it will actually grow that large, but I'm hopeful, because it's an amazing thing, to be able to prevent somebody from contracting HIV in the first place.

Campbell: They've been talking about that for years now, Kristine. Truvada, I suppose that one of the upsides there is that while a lot of its other, older legacy drugs have seen cannibalization, like you mentioned, Truvada's sales have fallen off by far less. That's because, in the U.S., you saw 9% year over year growth in the first quarter for Truvada because of preventive. 

The thing that investors need to remember, though, is Truvada's an old drug, and its patent protection is going to expire. That's where this next trial, which you alluded to, this Descovy, the next trial evaluating it as a PrEP treatment, is so important. Obviously, if Truvada goes off patent and Descovy's trial falls short, then that PrEP market is going to end up being dominated by generics. In the HIV space, that's going to be something that our investors are going to want to pay a lot of attention to.

Harjes: Yeah, that's a great point. Moving on to other growth opportunities for Gilead Sciences, there are three that stand out to me. Even as I say that, I realize that this show is potentially going to be kind of long, so we will move through them relatively quickly. 

The first one that I want to highlight is in NASH. This one has gotten a ton of attention from investors because of how big this disease space could potentially be. NASH is a progressive fatty liver disease that is estimated to become the leading cause of liver transplants by 2020. It blows my mind just how prevalent this disease is, and how big it could potentially be. I've read estimates that, in nations with fatty diets -- that would be the United States -- there are estimates that 5-20% of the population is affected by this disease. And it's growing, too, because that sort of diet and the obesity and the diabetes that go along with it are also growing at astonishing rates. Right now, there are no approved treatments for NASH. And yet, Gilead looks like it could potentially be first to market or best in class here.

Campbell: There are a lot of competitors working on NASH drugs, though. And, yes, you're right, Gilead Sciences is theoretically in the lead. They have a Phase III drug, Selonsertib, easy for me to say. That's going to have data next year. Theoretically, it could go in front of regulators as soon as by the end of next year. But you have other companies out there, like Intercept, that are also developing drugs for NASH. 

One of the things that investors need to recognize is that the NASH market is kind of uncharted territory. We don't know what the size of the market is. You can look at this patient population and say, "It's as big as the diabetes patient population," but people aren't really actively being treated for this disease yet. And frankly, it's kind of a silent disease, Kristine. One of the things that you're going to have to figure out is, how are you going to diagnose or evaluate these patients, find them, and then move them into treatment? And, how much will payers be willing to pay for a drug that addresses such a large patient pool? 

Without a doubt, very intriguing opportunity ahead. Just a couple of concerns or things that people need to bear in mind as that data comes out next year.

Harjes: Yep, absolutely. But, I do think that they have experience in similar spaces. I think that the NASH market bears a lot of resemblance to both HIV and HCV, where people might not even realize that they have the disease, it is potentially really huge, but it's also complex, different types of patients have different types of the disease. So, it'll require various combinations of different treatments put together in a cocktail to adequately address the needs of different patients. Hopefully, Selonsertib, which is Gilead's lead candidate here, could become the backbone of a really large franchise.

Next growth opportunity that I want to touch on is with anti-inflammatory. There's a drug called Filgotinib that Gilead is working on with their partner, Galápagos. It's a JAK1 inhibitor, so it's kind of similar to a drug called Xeljanz, which was already approved back in 2012 for rheumatoid arthritis patients. Rheumatoid arthritis is a disease where, it's fairly common, it's an inflammatory disease that is not always adequately controlled by the standard of care. That's why you get these new JAK inhibitors and other approaches to treating the disease. If the drug reaches the market, which would be in a few years, if all goes well, peak annual sales are estimated to be between $2-3 billion.

Campbell: Again, data coming out soon. You're going to have the first Phase III trial readout data later this year in patients who don't respond well to anti-TNF therapy, that would be drugs like the $18 billion a year Humira. That data is going to come out, like I said, later this year. Then, you have trial results coming out early next year, as well, in RA. RA, obviously, is a massive, megablockbuster indication. But, similar to NASH, there are a lot of other people who are working on next-generation drugs for RA, so you have a competitive field. 

One of the things that's going to be really interesting here is, how will Gilead Sciences position Filgotinib to be able to win market share against some of these other drugs? Now, the question has been asked of Gilead Sciences. What they're saying, Kristine, is that their drug is way more effective and potentially safer because it's more selective, it's a better-targeting drug for the JAK family, if you will. And if they're right, then yeah, maybe they can differentiate on that specificity. The other way that they're thinking they may do that is through a relationship with Verily, which is a spin-off of Google, where they're going to actually take a look at the different components that cause RA, and then try and show, "Wow, these people tend to respond much, much better to Filgotinib than to other drugs."

Harjes: Yep. Let's move on to Gilead's third and final growth opportunity that we want to discuss today, which is in oncology.

Campbell: Gene therapy, obviously, has massive promise as -- I'm not going to say curative because there are a lot of relapses still occurring for some of these people who are being treated with things like CAR-T therapies. But, it could dramatically reshape how we treat patients with various cancers, specifically blood cancers. They bought Kite Pharma for, what was it, Kristine? $11 billion? $12 billion?

Harjes: $11.9 billion. Yeah, right around there.

Campbell: They bought Kite last year to get into this space. Kite already has its first drug on the market, Yescarta. Yescarta has an opportunity, really, to help late-stage patients that have very few treatment options. As a result, people think that this could be a $1 billion drug. There is a Phase III trial that's ongoing right now, ZUMA-7, that could elevate its use to second-line, as a second-line treatment for people with diffuse large B-cell lymphoma. If that trial reads out well, then, yeah, I think you have a good shot here at, at least, hundreds of millions of dollars in sales, if not in the billion-dollar-plus category. Right now, in Q1, sales were only about $40 million, though.

Harjes: And ignoring the price tag, because that's its own question, I do think that the Kite acquisition was pretty smart strategically for Gilead Sciences. They've wanted to get into oncology for a while. Investors will recall that they had a drug called Zydelig, which ended up totally failing based on a bad safety profile. So, now, they're turning to this new CAR-T therapy -- which, granted, is not 100% safe, particularly this first generation of CAR-T therapies to hit the market. But, Yescarta is just that first generation. They will hopefully be able to come up with more drugs that use this CAR-T process that come after Yescarta and are safer. At that point, they will have more treatment centers that are up and running, because the actual administration process for CAR-T is ridiculously complex, and requires specialized training and certification in that administration. Their goal is to get centers up that cover 80% of covered lives. 

Hopefully, that will continue to go well. It looks like insurance coverage for Yescarta is also going as planned, where most patients are covered by their commercial plans, Medicare is covering it. Peak sales for Yescarta are a little bit under $3 billion, but hopefully there will be more drugs from the Kite segment of Gilead Sciences to come. 

I will put the asterisk out there that there is competition in this space. There are plenty of other companies working on CAR-T therapies. But, I do think that this is an enormous market, and it probably has room for multiple players.

Campbell: I have no plans on selling my Gilead Sciences shares, just to bottom-line it for our listeners. [laughs] It's in my retirement account, I'm going to hold on to it for the long-term. They have $32 billion in cash. That gives them a ton of financial flexibility to go out there and invest in R&D and buy other companies. They generate a tremendous amount of operating cash flow. They have industry-best margins. And they pay a dividend. It's a relatively competitive dividend that they've increased for three consecutive years. So, I'm willing to give them the benefit of the doubt. We'll wait and see how these other projects come out.

Harjes: My ultimate conclusion here is similar. I think I might be a little bit less bullish than you. I'm not sure that I'm going to sell my shares, but I'm certainly thinking about it. It does have that nice 3.5% dividend yield. And I think eventually, the growth will be there. But, I think, barring a big acquisition that the market reacts well to, this stock will be in the same place nine months from now, 12 months from now. That's just speculation on my part. For me, it's like, yes, I'm a long-term investor, I want to sit and hold Gilead for a long time, but I also do question if there are better places for my money at this point.

Anyway, I realize that we have gone super, duper long on Gilead. I think we're at 25 minutes or so already. So, I'm thinking, Todd, if you don't mind, let's put a pin in this and come back to it maybe next week and do a part two where we cover Celgene. What do you say?

Campbell: I think that makes a tremendous amount of sense, because there's some really, really cool data that came out at ASCO last week on Celgene that our investors will want to know. Stay tuned for part two, everyone.

Harjes: Yeah. I would hate to have to rush the Celgene component of the show, because I think it'll be, hopefully, just as interesting as the Gilead part. Hang tight, listeners! Sorry for the poor planning on our part, but hopefully we'll be back with an even more in-depth show than we otherwise would be able to do on Celgene next week.

As always, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show was produced by Anne Henry. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Kristine Harjes owns shares of Gilead Sciences. Todd Campbell owns shares of GOOG, Celgene, and Gilead Sciences. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends GOOGL, GOOG, Celgene, and Gilead Sciences. The Motley Fool has a disclosure policy.