Shibuya Crossing, Japan. Photo by Dick Thomas Johnson / Flickr Creative Commons
Gilead Sciences (GILD 0.47%) is coming off a stellar 2014. Revenue doubled from the previous year, and net income nearly quadrupled thanks to the growth of newly-launched hepatitis C drugs Sovaldi and Harvoni. Sovaldi, which was approved by the FDA in December 2013, hit more than $10 billion in sales for the year. Harvoni, which was only approved in the U.S. in October 2014, cleared more than $2 billion in only a few short months on the market.
These numbers are incredibly impressive, and yet there is reason to believe that the growth is only getting started. Gilead was recently able to gain regulatory approval for Sovaldi in another market that holds huge potential: Japan.
Getting a new drug approved in Japan can be exceedingly difficult, as their approval process is known for taking a long time. However, Gilead was granted an expedited review and approval based on the unmet need and lack of alternatives for patients who are infected with hepatitis C in the country. On March 25, the Japanese Ministry of Health, Labor, and Welfare approved the sale of Sovaldi in the country. Better yet, Harvoni is currently under regulatory review in Japan as well, and Gilead expects approval by the middle of 2015.
So what kind of opportunity exists for these drugs in Japan?
While the overall population of Japan is less than half that of the U.S., the incidence rate of hepatitis C in Japan is far higher than it is stateside. There are about 150,000 new cases of hepatitis C that are diagnosed annually in the U.S., but that number looks tiny when compared to the 350,000 that are diagnosed per year in Japan. Prevalence in Japan is much higher than the U.S. because during the 1950s the country used a lot of non-disposable glass syringes for medical treatments like immunizations. This had the unfortunate effect of spreading hepatitis C rapidly around the county.
While the sheer size of the Hepatitis C problem in Japan is clearly indicative of a large market opportunity for Gilead, projecting a precise sales figure for Sovaldi in the country is exceedingly difficult. In Japan, the government negotiates the price for all drugs that go on sale in the country, so coming up with a sales figure requires a lot of guesswork about pricing and discounts that may be negotiated. However, Sovaldi does has a list price of $84,000 per treatment course in the U.S., so even if Japanese officials are able to manage a sizable discount, the total market opportunity is still monstrous.
It's also important to remember that Sovaldi cures hepatitis C, which reduces or eliminates the need to later treat some of the expensive complications that can come from the disease. Paying up for the treatment now could save the government a substantial amount of money in long term, which may make them more willing to pay a high price for Sovaldi.
We won't know if the launch of Sovaldi in Japan will go nearly as well as it did in the U.S. and the EU until Gilead's next quarterly report, but perhaps management was giving investors a hint when they raised their guidance for the year by $2 billion after reporting Q1 results at the end of April. Management now expects revenue for the year to be in the range of $28 billion-$29 billion for the year.
When you combine the opportunity that exists in Japan along with the continued adoption of these drugs in the U.S. and EU, the near-term future for Gilead looks quite bright. This is just one of the many reasons that I recently made the decision to buy shares in the company.
