For years treatment of hepatitis C has been the platform for Gilead Sciences (NASDAQ:GILD) notoriety and success. But what will happen when partnerships form between a powerhouse, and a technologically innovative corporation?
As Gilead Sciences leads the market with $12.4 billion in sales last year, Johnson & Johnson (NYSE:JNJ) is pairing its money with Achillion's (NASDAQ:ACHN) technology to create a less invasive, more effective drug that could change the market altogether. Who will you buy?
A full transcript follows the video.
Michael Douglass: Johnson & Johnson taking a shot at Gilead Sciences. This is Industry Focus.
Hi, Fools! Healthcare analyst, Michael Douglass here with the health care contributor Todd Campbell. Welcome to Wednesday's health care edition of Industry Focus. Have we got a good show for you!
We got a listener question, which we always appreciate. By the way, please send us an email. IndustryFocus@fool.com. Again, that's IndustryFocus@fool.com. Johnathan sent us a question on what we were planning on covering anyway today. Lucky timing on our part there, I guess, but Johnathan asks: "Wanted to get your take on the Hep-C market." Just today, a lot going on with, particularly, Johnson & Johnson and Achillion Pharmaceuticalsand their new hepatitis C tie up.
So, I figured we'd go ahead and zone in and really break down that deal and talk about it. For those of you haven't been with us previously, Gilead Sciences is the big dog in hepatitis C with Sovaldi and Harvoni. These, essentially, hepatitis C cures that, in many cases, remove the need for Interferon and Ribavirin, which are these side effect laden drugs.
Really, a transformative opportunity for the market and for Gilead shareholders who saw -- largely based on growth from hepatitis C -- a 3x, or 4x increase in earnings per share last year, and are looking at some pretty good growth this year, too. As you can imagine, in a massive market like hepatitis C, 150 million people worldwide -- according to some estimates -- have the disease. You can imagine there's going to be some competition.
There has been. AbbVie's (NYSE:ABBV) Viekira Pack has gotten off to a slow start, but they are expecting it to be hitting the million dollar run rate by the end of the year, and now we've got Johnson & Johnson -- not a small company by any stretch of the imagination -- and Achillion Pharmaceuticals announcing a tie up just this morning regarding hepatitis C.
So Todd, let's go into the deal a little bit. What's the general headline here?
Todd Campbell: What's really fascinating about this deal is that Achillion was one of the last remaining pure plays in Hep-C.
Douglass: Yeah, they were.
Campbell: As you said, a lot of these competitors really want to knock Gilead off the pedestal and grab a piece of this market. It's a huge market. If you annualize the first quarter sales for Gilead in this indication you're looking at an $18 billion run rate just for Gilead this year alone. That's just remarkable for one company in one indication.
What's interesting about this deal -- there's a couple things that are interesting. First, everybody was hoping Achillion would get bought straight out. Lock, stock, and barrel. Someone would show up, hand a big check over, and acquire the company. So, shares were bid up ahead of that and we always -- at The Motley Fool -- remind people "Don't buy stocks based on acquisition rumors."
Campbell: Ever! Focus on the technology, the research, the story behind the scenes and come to your own conclusion. There is some disappointment out there that "This company didn't get bought outright." But this deal shouldn't be 'poo-poo'd', if you will. It's really an interesting deal because Johnson & Johnson has a very deep level of experience in Hep-C development. It wasn't that long ago that Johnson & Johnson was in a horse race with Gilead Sciences on coming to market with the first oral treatment for Hep-C.
They had Ilysio in the works. Gilead Sciences drug proved to be better. They both won approval at the end of 2013, Ilysio ended up with about $2 billion in sales last year to Gilead's $12.4 billion in sales. So, Gilead won, but Johnson & Johnson...
Douglass: Hands down.
Campbell: Yeah, hands down. But Johnson's not giving up. This is just further evidence that they are committed to battling in the next generation of Hep-C treatment. Which, in my opinion, is going to focus less on efficacy, and safety -- two things that had been addressed in the first battle -- and next on patient adherence by reducing treatment duration.
Douglass: Yeah. That's going to be -- to my mind at least, and I imagine to yours too, Todd -- this is probably going to be the chance for the Achillion drugs which will now be marketed by Johnson & Johnson. Assuming they ultimately get approved, of course. That's going to be an opportunity ...
Campbell: Achillion could not have gotten a better partner. Johnson & Johnson's got take over all the development costs, all the commercialization costs, and if these drugs succeed in trials -- and that's not a given.
Campbell: Anything can go wrong, derail these trials that are going to be launched by Johnson & Johnson. But if it does pan out, then Johnson & Johnson obviously has a global sales force that could get ramped up and could drive sales for this drug, and actually make a go of it against Gilead. There's a lot that needs to happen between here and there.
Specifically you've got a situation where Johnson & Johnson has now licensed global rights to Achillion HCV, Hep-C pipeline. That pipeline includes ACH3102, and ACH3102 is a next generation, S5A inhibitor. Basically it targets the same target that Ledipasvir does in Gilead's top selling Harvoni -- which is a mashup of that Ledipasvir and Sovaldi.
So, the idea is "Can we come up with a better combination that would deliver similar efficacy, but do it in a shorter treatment duration?" In very small trials, they've been able to effectively cure patients in both six weeks and eight weeks by combining ACH3102 and Sovaldi. That has gotten people's attention.
It's like, if J&J license 3102 -- which it has -- and then it can take that and combine it with -- it acquired some drugs that worked similarly to the way Sovaldi does, last fall when it bought Alios and got their nuke pipeline -- So, they can combine it with that, then possibly they can come up with a pan genotype drug that would outperform, or equally perform with Harvoni, but require patients to take it for less time.
Douglass: Right, and when you think about this, folks, at the end of the day efficacy and safety are the Holy Grail. It's going to be -- in this market, if you're not effectively curing Hep-C, you're not competing because that's just where the bar has been set by Gilead Sciences. But, the other thing we're increasingly hearing -- not just from insurers and PBMs, and consumer advocacy groups, but also from governments around the world -- is there are concerns about increasing health care expenses.
So, when you think about that opportunity with a shorter duration drug, if you price it per pill, or per treatment, the same as the longer duration drug, it's going to end up being cheaper. And if you can cut down that amount of time you have to take a drug then there's less opportunity for patients to actually forget to take a pill, go off treatment for whatever reason. That means you should theoretically also have a benefit to curate.
So, it's cheaper, and also you have better adherence. That looks like a win-win. I think that is definitely -- Todd, I think you hit the nail on the head -- that's definitely what Johnson & Johnson is targeting here. The question of course is: How many things have to line up for that to go well, and for this to actually have been a good deal that can knock Gilead off its pedestal?
Campbell: A lot of things. There's no question. You look at it, and historically 90% of drugs that enter human clinical trials fail. When investors are going out and they're looking at the news announcements, these press releases, "This drug did great in phase I, this drug did great in phase II." Well, 30% to 40% of drugs that go into phase III fail. So, people have to take that with a grain of salt. There's a lot of stuff that could go wrong here.
That being said, we already talked about J&J. They probably wouldn't have entered into this deal and committed as much money as they did to the deal. The deal -- basically what they said is "Not only are we going to license these drugs from you, take over the cost of developing and commercializing them, but we're also going to agree to offer you up to $1 billion in milestones if the drugs work out" -- which is obviously a lot given that Achillion's current market cap is $1 billion -- "We're also going to give you royalties in the mid-teens to low 20s, and then on top that we're also going to buy a bunch of shares in your company."
Campbell: Johnson's making a pretty big commitment to the technology that Achillion has. Whether or not that proves to be money well spent -- Johnson's got the money to spend. So, it can take the hit if it doesn't pan out, but there's still a lot of questions that need to be answered.
Douglass: Yeah. I would say, me personally as a Gilead shareholder -- Todd, I can't speak for you as a Gilead shareholder -- but me personally as a Gilead shareholder; I'm not that concerned yet. I think it could be a threat to Gilead some years down the road. If the data lines up and if FDA approval comes, and if commercialization goes well. But in the here and now, you've still got Sovaldi and Harvoni indisputably -- I think --winning these markets.
And Gilead isn't exactly sitting on its hands either. They're looking at opportunities to do new indications within Hep-C and then also to reduce that treatment time as well.
Campbell: Yeah. You've got -- Gilead is not just going to sit by and give this battle up easily.
Douglass: No! Not after it's made so much money at it.
Campbell: No! They have a slate of intriguing drugs in their own pipeline that could end up developing a Harvoni -- which is approved for use in genotype I -- they could end up developing that type of a drug for all the other genotypes as well. We're going to get some data on that. That includes Gilead's 5816 combined with Sovaldi.
That data should come in the third quarter. If it looks good you could get a filing by the end of the year, approval at some point in 2016. That would be a big win for Gilead. You also have, further down in the pipeline, triplet combination that is being studied for 6, 8, and 12 week duration period.
So, you could end up getting a 6 week treatment coming out of Gilead in the next few years as well, too.
Douglass: Yeah. At the end of the day, this is definitely and intriguing combination. It could be another big player coming into this space, but I think it's just too early to tell.
Campbell: Right. I own two of the three players. I don't own Johnson & Johnson currently.
Douglass: Oh, see I do. So, I guess we balance each other out.
Campbell: Yeah. The two of us have all three covered. But my position in Achillion is small. Much smaller than it is in Gilead. That's my full disclosure on that front.
Douglass: Yeah. Exactly. Well, that sounds good. Todd, thanks for your take, as always. Folks, again, we love questions. It's always a nice opportunity to see what people are thinking about and to try and learn a bit more about it and it's a nice excuse for us to go dig into a company. Sometimes one -- not so much in the Hep-C space because as you've been listening now, we just love talking about this.
Thanks for listening. Stay tuned for Industry Focus tomorrow. Todd, thank you as always. For The Motley Fool, I'm Michael Douglass. Happy investing out there and Fool on!
Michael Douglass owns shares of Gilead Sciences and Johnson & Johnson. Todd Campbell owns shares of ACHILLION PHARMACEUTICALS, INC. and Gilead Sciences. The Motley Fool recommends Gilead Sciences and Johnson & Johnson. The Motley Fool owns shares of Gilead Sciences and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.