It's rare enough for a biotech to succeed, and even rarer for a biotech to ultimately dominate a therapeutic area. But to do it twice? That's almost unheard of, and yet here we are with Gilead Sciences (NASDAQ:GILD). Building off of a $9 billion franchise in HIV, Gilead is set to become the leader in the emerging multibillion-dollar hepatitis C (HCV) market. Odd as it may seem given the 270% run in these shares over the last two years, there may yet be value left in these shares.
Sovaldi off to a good start
Gilead is only in its very early stages with its HCV franchise, but the sales of its lead drug Sovaldi have been strong. Fourth quarter sales were about 85% higher than the Street expected, though much of the beat was due to inventory stocking. Even so, prescriptions continue to grow at a 25% week-over-week clip, blowing away the prior track record of the last meaningful step forward in HCV, Vertex's Incivek.
AbbVie will be competitive, but a lot comes down to pricing
In the mad dash to compete in the market for next-gen HCV treatments, a lot of would-be competitors have fallen by the wayside due to inadequate efficacy or unacceptable safety issues. AbbVie (NYSE:ABBV) has emerged as a valid and viable contender with its all-oral regimen.
AbbVie's Phase III studies of ABT-450 (w/ritonavir), ABT-267, and ABT-333 showed the requisite efficacy, with SVR12 rates of 90% to 100% in GT1a and GT1b patients, including treatment-naive, treatment-experienced, and those with cirrhosis. The details matter, though, as GT1a SVR12 results were only 90% without ribavirin and the Turquoise-II study saw 6% viral relapse, while the Pearl-IV saw a 8% relapse in the ribavirin-free group. It's also worth remembering that the AbbVie dosing schedule isn't as convenient – Gilead patients taking the Sovaldi/ledipasvir combo take one pill, once a day, while AbbVie patients take six pills twice a day.
Gilead has talked about targeting 80% to 90% market share in HCV, and many analysts have gone along with that. I believe that is probably too aggressive. The AbbVie results weren't perfect, but they were pretty good – good enough, I believe, that even modest discounts to the Sovaldi price ($84,000 a year) could lead to 20% to 30% share. Seeing as the cost of production will likely be less than $1,000, I believe AbbVie will be willing to be flexible on pricing if that's what it takes to build share.
Will others make a difference?
The SVR12 rates reported by Gilead and AbbVie have been very, very good, and that sets a very high bar for would-be competitors. Merck (NYSE:MRK) and Bristol-Myers (NYSE:BMY) are both likely to give it a try, though.
A small study of Merck's combo (MK-5172/MK-8742) showed a 100% SVR12 in treatment-naive GT1b patients without ribavirin. In a different study segment that included ribavirin and a 70/30 mix of GT1a and GT1b patients, the SVR12 was 96%. While the need for ribavirin would be a definite drawback compared to Gilead's combo, the dosing (two pills, once a day) would likely make it a commercially viable combination.
For Bristol-Myers, it's all about combining forces with Gilead. Bristol-Myers has had some huge setbacks with the compounds it acquired in the Inhibitex deal, but the company's NS5A inhibitor daclatasvir could be a potent partner to Gilead's Sovaldi. Early stage studies have shown 100% SVRs in patients who've already failed Incivek and Victrelis, and this combo also appears effective in genotype 3 patients, which is more common outside of the U.S. Gilead is doing nothing to cooperate with Bristol-Myers on this combo, but there is at least an outside chance that this will be a meaningful product for Bristol-Myers.
But wait, there's more
If Gilead was "only" a dominant player in HIV and HCV, that would still likely mean over $16 billion in revenue in 2020. There is more to this story, though, as Gilead has been building up a pipeline in oncology, cardiovascular, and other therapeutic areas. There are some questions about how lead drugs idelalisib and simtuzumab will fare in terms of efficacy and tolerability, but Gilead may well have some additional $1 billion-plus drugs in this relatively new oncology pipeline.
The bottom line
Expectations are huge for Gilead, but the company may still yet have room to run. Strong established market share in HIV will generate significant cash flows, and there is a credible case that the introduction of new HCV combos will increase the patient population as more people seek out testing and treatment. With that, I'm willing to project 12% long-term revenue growth for Gilead, with FCF growth approaching 20%.
Discounting that back, I come up with a fair value of over $86 for Gilead today. Certainly there are risks that rivals like AbbVie and Merck will get more share of the HCV market than expected, as well as risks that there aren't as many HCV patients as believed and that payers push back on pricing. All things considered, though, Gilead still looks like a stock with some room to outperform.