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Did Gilead Sciences Make an $11 Billion Blunder?

By Keith Speights - Dec 9, 2018 at 7:00AM

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Spoiler alert: The answer is "no."

I read an interesting article recently about Gilead Sciences (GILD 0.42%). Bloomberg Opinion columnist Joe Nocera summarized Gilead's quest to market drugs that cure hepatitis C. The author did a great job explaining the unique challenges for Gilead and the entire biopharmaceutical industry in developing products that cure rather than just treat diseases.

Nocera's points in the article were on target. However, I questioned the sub-headline of the article: "Curing diseases like hepatitis C just doesn't pay."

Gilead Sciences spent $11 billion to acquire Pharmasset in 2011 to get the smaller biotech's hepatitis C virus (HCV) program. The sub-headline of Nocera's article (which, to be fair, could have been written by editors rather than the author) seemingly stated that this investment didn't pay off. But did Gilead really make an $11 billion blunder?

Man in suit watching money go down the drain

Image source: Getty Images.

Running the numbers

Gilead has introduced four HCV drugs since late 2013: Sovaldi, Harvoni, Epclusa, and Vosevi. Sovaldi was the first of these drugs to reach the market. All of the others are combinations of Sovaldi and other drugs. 

It's pretty easy to determine whether Gilead's acquisition of Pharmasset paid off. The yearly revenue generated by the HCV drugs that Gilead picked up in the deal is readily available. And all of the approved drugs from the Pharmasset acquisition except Vosevi became blockbusters with annual sales of $1 billion or more.  

Over the last five years, Gilead Sciences has made a whopping $58.5 billion from its HCV franchise. The actual total is a little higher because Gilead began including Sovaldi sales in its "other" revenue this year. There's no way to know exactly how much of the $285 million in sales the company's other drugs generated in the first three quarters of 2018 stemmed from Sovaldi.

You be the judge: Did Gilead's initial $11 billion to obtain drugs that cure hepatitis C pay off? I think anyone looking at the numbers would readily admit that the investment has paid off quite nicely.

Remember, too, that Gilead's HCV drugs continue to make a lot of money. Although sales have steadily declined over the last three years, Gilead expects HCV revenue to stabilize going forward. The biotech's HCV franchise should generate close to $4 billion annually for years to come.

Granted, we haven't factored in any of Gilead's additional costs in developing and commercializing its HCV drugs. Neither have we calculated a net present value of the company's acquisition cost and HCV revenue to adjust for the time value of money. A dollar spent or made five years ago isn't worth the same amount as a dollar spent or made today. Still, it's pretty clear that curing hepatitis C has definitely paid off for Gilead Sciences in a big way. 

What Wall Street wants

The subheading of Nocera's article doesn't, however, reflect the main point of the article. Actually, Nocera didn't state that Gilead's investment in launching a cure for hepatitis C didn't pay off. His main point is best summarized in this statement from the article: "But it turns out that Wall Street much prefers a drug like AbbVie's (ABBV -1.00%) Humira, which treats -- but doesn't cure -- rheumatoid arthritis, Crohn's disease, and a variety of other illnesses."

That point is correct. And it's totally understandable why Wall Street would like a drug like Humira. After all, it's the top-selling drug in the world and is likely to remain at the top for several more years.

But in 2015, Gilead's HCV drug Harvoni made nearly as much as Humira did. Harvoni and Sovaldi combined made $5 billion more than Humira made that year. It's not that Wall Street only likes top-selling blockbuster drugs; the Street likes top-selling blockbuster drugs that keep on delivering huge sales for a long time.

The problem is that drugs that cure diseases aren't likely to provide the sustained revenues that Wall Street wants. In Gilead's case, the company enjoyed a big surge in revenue during the first couple of years after the launch of its first HCV drugs. But after that, the number of patients needing treatment began to dwindle. Cured patients don't come back for more medications.

A new way of thinking

In August, I wrote an article titled "The Cost of Cures: How Investing in Biotech Stocks Could Soon Be Radically Changed."  My premise was that the world of medicine is changing. Wall Street might want drugs like Humira that rack up billions of dollars in sales every year for over a decade, but that's likely to become less common than it is now.

Several biopharmaceutical companies are developing drugs that hold the promise of curing rather than merely treating diseases. Gilead itself hopes to develop a cure for HIV. Gene editing could dramatically change how genetic diseases are addressed by modifying DNA sequences that correct the genetic mutations that cause these diseases. 

If you read Nocera's article -- and I highly recommend that you do -- you might notice that there's an alternate title that shows up in the tab of your web browser and in the URL link for the article. This alternate title is: "Gilead's Cures for Hepatitis C Were Not a Great Business Model."

I think the accuracy of that statement is debatable. Gilead made a huge return on its HCV drugs and continues to do so. But it's definitely true that Gilead's cures for hepatitis C entailed a new business model for the biopharmaceutical industry. And it's a new business model that investors should prepare to see a lot more in the future -- whether Wall Street likes it or not. 

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