Gilead Sciences (NASDAQ:GILD) and Sangamo Therapeutics (NASDAQ:SGMO) recently delivered disappointing data on highly anticipated drugs. The results cast doubt on each of these companies' pipeline potential. Should investors be worried?

In this episode of The Motley Fool's Industry Focus: Healthcare, host Shannon Jones and Motley Fool contributor Todd Campbell discuss what the data means for these companies and what could be in store for them. They also consider how Evolus(NASDAQ:EOLS) approaching wrinkle-fighting therapy, Jeuveau, may impact demand for Allergan's (NYSE:AGN) multibillion-dollar blockbuster, Botox.

A full transcript follows the video.

Check out the latest earnings call transcripts for companies we cover.  

This video was recorded on Feb. 13, 2019.

Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today is Wednesday, February 13th, and we're talking Healthcare. I'm your host, Shannon Jones. I'm joined via Skype by healthcare guru, Todd Campbell. Todd, how are you? 

Todd Campbell: It's been a crazy week, Shannon, I tell you! My son slipped in the snow. We've got lots of snow here in New Hampshire, which was rare. It hasn't been very snowy at all this winter. And sure enough, he slipped and broke his arm. So I've been running around the last 24 hours helping him get himself all settled in. It's been a little crazy!

Jones: Been a little hectic in the Campbell household, for sure. Certainly hope he feels better, that's a terrible thing to do. I've slipped on the ice before, thankfully didn't break anything, although I felt like I broken my entire pelvis when I did but, but it was OK. So, I understand how it feels. Glad he's on the mend.

I'm even more excited for this week, Todd, because it's been a bit since we've actually done a good news roundup. There's been no shortage of interesting news that's come out in the healthcare space. Really excited to talk about the stories and headlines we've been seeing lately.

Campbell: Today's show is going to be a great reminder to biotech investors that frustrating flops are pretty common. They can pose a very big risk, so they should not be underestimated.

Jones: Very true. Disappointing study results came out from biotech giant Gilead Sciences, ticker GILD, this week. Todd, yet another black eye for a company that's had a rough couple of years and has really been desperate for some good news, especially drugs that could help drive growth, because they've been in need of growth for some time. Before we get into the study data that they read out this week, Todd, all focus for Gilead has been on a market called NASH. 2019 has been dubbed the year of NASH. Todd, tell us why NASH is such an important therapeutic indication for Gilead and the industry as a whole.

Campbell: It might be helpful to give listeners a little bit of background on Gilead, in case they're new to the story. Gilead revolutionized the treatment for hepatitis C with the launch of a drug called Sovaldi in 2014. Followed that up with a couple of other important launches. Really crazy, crazy effective new therapies that were used by patients to achieve functional cures. As a result, sales went through the roof. At one point, just from the hepatitis C drugs alone, they were bringing in like a $20 billion run rate in sales. As more competition has come into that space, and as prices have come down for Gilead's drugs and more people have been treated and cured of that disease, sales have really been falling. They haven't been able to offset those falling sales with growth out of their traditional HIV drug franchise. 

One way that they were hoping to be able to kick-start themselves back to growth was by developing drugs for nonalcoholic steatohepatitis or NASH, which is another liver disease which is fast becoming a major cause of liver transplants. NASH liver disease is due to consuming a high-calorie diet and living a relatively sedentary lifestyle, so it's obviously getting more and more prevalent within Western economies, especially. In healthy people the liver contains less than 5% fat. But as fat content in the liver increases, you get inflammation that can lead to scarring or fibrosis. As that fibrosis gets more widespread, that can create the risk of liver failure and a need for liver transplants. Millions of people are thought to have NASH. There's no FDA-approved treatment for it yet.

Jones: Gilead, up until this point, was really in the lead to be a front runner into the NASH market with their drug Selonsertib. They were able to put out Phase III study results, their STELLAR trials. Speaking of the trial, here's what they read out, and here's what I think is so terrible about this story. 900 patients were randomized to receive one or two doses of the drug or a placebo once a day. After 48 weeks -- and this was of a 240-week planned trial, by the way -- Gilead checked to see how many participants had actually experienced an improvement in fibrosis without the worsening of NASH. Of the 354 patients who took the higher dose of Selonsertib, 14.4% experienced improvement, compared to 12.8% in the placebo arm and 12.5% in the lower-dose cohort. What all that means is that, really, neither dose actually statistically outperformed the control. And, actually, the lower dose did much worse. 

Todd, it really doesn't get much worse than that when you're talking about a Phase III trial.

Campbell: Yeah. [laughs] Yeah! There's not much to look at with this and feel encouraged. There's some important lines or connect-the-dots that we have to do following this, we'll get to that in a second. 

The data we just saw from the Phase III is a good reminder not to put too much emphasis on Phase III or mid-stage data because oftentimes as you get longer treatment periods that are being evaluated in Phase III, and you get more people enrolled in studies, Phase II data does not repeat in Phase III. That's pretty much what we saw here. If you look at the mid-stage studies they'd done, 43% of the patients in the mid-stage study saw at least a one-stage improvement in their fibrosis. That's obviously very different than the readout that we got at the 48-week mark. The mid-stage study, that look was at 24 weeks. Again, a good reminder to everybody not to draw too many conclusions exiting mid-stage studies concerning how Phase III studies may play out. 

One of the biggest things that investors ought to know about this is that Selonsertib is kind of like a backbone therapy for other trials that Gilead Sciences is conducting in NASH. The hope was that Selonsertib would have data that would be good enough to support an FDA approval of it as a stand-alone monotherapy in NASH, and that other trials that are ongoing that are using Selonsertib alongside some other Gilead Sciences drugs, those would then read out trial data that was positive later on. And then, you would migrate from, say, the monotherapy like they did in hepatitis C, where they have Sovaldi, and then they had two drugs combined together to make Harvoni. That was the way they were approaching it here for NASH. With Selonsertib epically coming up short here in this trial, it does cast a significant amount of doubt on what we may see in those future combination drug trials. 

Jones: Yeah. All hope isn't necessarily lost here. As you mentioned, you've got the combination studies. Also, it sounds like they're going to be evaluating this drug in earlier stage patients. We'll have to wait and see on that. But right on their heels, you're talking about competition coming. Probably the most notable especially since this disappointing data just came out is Intercept. What can you tell us about Intercept? 

Campbell: Intercept already has a drug on the market called Ocaliva. They're researching that in NASH with data that's fast approaching. That should be coming out within the next couple of months, if not sooner. Once that data is out, theoretically, they could apply for FDA approval or a label expansion for Ocaliva for NASH. That would give them the first mover advantage that Gilead had hoped to achieve. 

There are also other drugs in development in Phase III trials that are likely to read out data over the next 12 to 18 months. One at Madrigal, MDGL. Another at Viking, VKTX. Genfit, a French company, also has a Phase III trial under way. There's a tremendous amount of activity because this is a mega, multi-billion dollar potential market. Gilead now has to go back to the end of the line, if you will, in seeing when they might be able to launch their NASH drug.

​Jones: ​ Yeah. So, you've got a market with competition. I went and looked, you've got right now over 30 drug candidates currently in trials for NASH. So, I don't think that this paints a black eye for this space in general. In particular, I do think some of the other competitors that you mentioned, not only do they have different mechanisms of action compared to Gilead's drug, but also, a more favorable study design and endpoint selection, which could actually work out in their favor. A lot to look forward to here. All I can say, Todd, is when the new CEO, Daniel O'Day formerly of Roche, takes the reins of Gilead come March 1st, he'll have a lot on his hands to sift through and figure out the way forward.

Campbell: The other thing investors ought to keep an eye on is that big cash balance that Gilead Sciences has. If, now, they're a little bit more concerned about their NASH drugs in their pipeline, maybe they take a look at acquiring a company like a Viking or something like that, if they really want to make sure that they're a big player in this indication.

Jones: Yeah. Lots to look forward to with Gilead. We'll have to wait and see. In other news, earlier this month, we had yet another gene editing setback, Todd. This time, the bad news came the way of Sangamo Therapeutics, SGMO. I should note when we talk about gene editing, Sangamo uses a different approach than the CRISPR gene editing that many of our listeners have probably become all too familiar with. You've got a different approach. Nonetheless, Todd still a black eye for the whole gene editing space in general. What happened here?

Campbell: Sangamo has been working on something called zinc finger nucleus gene editing since the 1990s. Unfortunately, its laboratory dustbins are filled with failed trials. They reported out data very recently from a trial evaluating one of their gene editing therapies in MPS I, which is a lysosomal storage disorder where basically genes don't produce a particular enzyme that's necessary for breaking something down that's a byproduct of cellular death. As those build up into the organs, it can create, unfortunately, life-threatening complications.

What they'd hoped would happen would be that they could use their gene editing approach, where they take these zinc finger proteins and they target them to specific spots in the DNA, make a slice, and then insert in code that would allow the person to be able to now produce those enzymes. Their hope was that that would be an effective approach. However, the data that they reported for that therapy fell short. There was no evidence of a restoration of the production of the enzyme that's missing, which I'll call IDUA, is the abbreviation for that missing enzyme. 

Jones: Overall, in five of the six patients that were enrolled in this study, the enzyme activity and those sugar levels, which is basically what they were trying to reduce that causes that organ damage you mentioned, they barely changed in the 24 weeks following administration of Sangamo's therapy. 

There was a bright spot, though. There was one subject, Subject 6, that did see some temporary improvement in enzyme and those complex sugar levels. I think that's why there's still some, albeit tempered, expectations about the future of this drug. The patient was one of two subjects to receive the highest tested dose. So, I think what you're seeing now is Sangamo trying to figure out a way forward. I know that they will be moving forward with testing the highest dose in a few more patients. They're also going to be analyzing the liver biopsy tissue to see if there's any evidence whatsoever of successful gene editing.

Also, in the pipeline, they've got a second generation therapy in the works. It could be in a clinic this year. Maybe it can boost some efficacy, hopefully a lot more than what we saw with this particular study. 

Campbell: Yeah. I think proof has to be in the pudding at this point for Sangamo and investors considering. Until I see real evidence in more advanced clinical trials, it's very hard for me to recommend this stock to anything but the most aggressive investors. This MPS I failure comes on the heels of a failure last fall in MPS II, which is a cousin-like disorder, again, in an ability to produce a different enzyme that's also necessary for breaking down those GAGs that are released during cell death. I think, following the MPS II last fall failure, the MPS I failure that just happened, investors really should put this on a wait-and-see, that's how they should approach this stock. As exciting as the prospect is for gene editing, it's hard to come up with a rationale for going out there and picking up this stock.

Jones: I totally agree. Certainly not encouraging for a company that's been around as long as Sangamo Therapeutics. Like you said, we'll have to wait and see. Ultimately, though, you've got the zinc finger approach, you've got CRISPR, you've got over 6,000 genetic disorders that could be treated. Certainly not a shortage of opportunity here. But, in terms of the field itself, a lot left to be desired. We'll just have to wait and see. 

To round out the show, we actually have some good news! That's a rarity, right, in biopharma? No, I'm kidding. There's plenty of good news to go around. But we cannot close this show on a down note. The good news actually comes by the way of a tiny company called Evolus, EOLS, that's actually making moves into Allergan's space, specifically for the billion-dollar blockbuster drug Botox. Todd, what can you tell us about Botox? Do you think their drug could actually be a formidable foe?

Campbell: This is a fascinating story! Really glad that you brought this up for a topic for this week's show, because I was not familiar with this small-cap company, Evolus. Market cap if $792 million. Relatively small company. But it's a really fascinating story!

Most people who are aware of Allergan are aware of their top-selling drug, Botox Or, if they're not aware of Allergan, you should know, guess what? Botox is made by Allergan. Botox is very widely used for cosmetic procedures, removing the frown lines, if you will, in people's foreheads. It rakes in billions of dollars a year across multiple indications. What's fascinating about Evolus is that its leadership is packed with ex-Allergan people. The ability for them to get an FDA approval recently for this new drug -- and Shannon, how do you think you pronounce this? 

Jones: Jeuveau, very French, beautiful-sounding name for beautiful people. 

Campbell: [laughs] That's right! Exactly! What's fascinating about this is that they think, now that they have the FDA approval, they'll be able to launch this alternative at a discounted price. And within the next two years, they'll be able to be the second most commonly prescribed for this indication, removing frown lines. If they're right, that could represent hundreds and hundreds of millions of dollars in annual sales for the company.

Jones: Yeah. This is, like you said, such an interesting story. Going back in terms of the history, the company Evolus actually got a complete response letter, a CRL, from the FDA just last year due to manufacturing issues. Thankfully, the company was able to get those corrected, received approval last week. So, now, as you mentioned, they are aiming for spring. What's so interesting to me is that, No. 1, they're not actually going after many of the medical indications that Allergan's Botox also has. You're talking things like migraine, you're talking things like overactive bladder. They're purely going after the aesthetic market, which is interesting. They're also going after millennials, which I also think is interesting. We had some debate here in the office among Fools about whether or not you would take a biosimilar substitute for Botox as a millennial and be fine with it because you're getting a discount. It was pretty divided, Todd. I was kind of shocked. We'll have to see how this plays out. 

What I do know is that Allergan is certainly not resting on its laurels here. This is a multibillion dollar drug for them. They're talking about ramping up their sales force, they're talking about really aggressively beefing up their direct-to-consumer advertising. And, they also filed a complaint to actually block the import of this drug. Todd, a lot going on here. I never thought, in this show, at least, we'd be talking about the wrinkle wars. But, apparently, it's 2019 and it's here!

Campbell: [laughs] As part of the launch strategy, they're actually going to roll out more data from trials involving this drug, including head-to-head data against Botox. I think it's very likely that they're going to show that they have a non-inferiority to Botox based upon data they already reported from a study that backed an approval in Canada. They're also launching that drug in Canada this year. Europe is also on the table, by the way. They're hoping to get approval for that within the next six months. 

I think, Shannon, to go back to what you were saying before, would people use this instead of Botox, because of Botox' long history, if they show non-inferiority and they're able to market that, maybe. Their CEO was formerly the senior vice president of U.S. Medical Aesthetics at Allergan. He was in charge of all of those brands, including Botox. All the players, all the people who are using it, all of the centers that would be providing this -- and you mentioned earlier one of the things that's interesting about this. They're not going after the therapeutic benefits part of the market that represents a lot of Allergan's Botox sales. That gives them a lot more flexibility to market directly to consumers, to wine and dine the physicians that would be prescribing, because they're not going to be held to some of the same standards, because they're not going to be selling a drug that's reimbursed by the federal government, i.e. Medicaid or Medicare. It's all going to be self-pay market. That gives them a lot more flexibility when it comes to marketing and pricing this drug.

I just went back and looked at some numbers. If you look at the market specifically that they're targeting, it's $1.2 billion a year right now, and growing. Of that $1.2 billion, Botox has about a 70% market share. You're talking about $700-800 million of the $3.6 billion in Botox revenue that's being challenged here by this. So, formidable foe? Yeah. But, I think what we'll probably end up seeing is a relatively slow launch, and then as the marketing efforts ramp up, maybe you're carving away a couple of hundred million, $300 million and then $400 million worth of sales to really challenge Allergan. But it's certainly not going to derail Botox. 

Jones: Yeah. I think you can safely say, put a wrinkle in Allergan's Botox revenues is the best way to describe it, Todd. [laughs] But, to your point, granted, this is a close competitor, it's a biosimilar. But you also have competition from other anti-wrinkle injections that are already on the market, and then, Revance Therapeutics is also developing a potential therapy that could have a longer effect in treating wrinkles. Especially over the next couple of years, this space is going to become much more crowded. How much of it they'll put, in terms of Allergen's top line, we'll have to wait and see. Really interesting story. Welcome to the wrinkle wars!

Alright, guys, thanks so much for taking the time to tune in and listen this week! As always, people on the program may have interest in the stocks 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. This show is produced by Dan Boyd. For Todd Campbell, I'm Shannon Jones. Thanks for listening and Fool on!