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Digging Into Disappointment: What Investors Need To Know About Sarepta and Gilead Sciences' "Bad News"

By Todd Campbell and Kristine Harjes - May 8, 2016 at 11:41AM

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Discussing the details behind the FDA's negative vote on Sarepta's DMD drug and Gilead Sciences' sliding hepatitis C sales.

It can be tempting to buy stocks when they fall because of bad news, but not every stock that drops is a bargain. Sometimes, stocks that fall can expose investors to too much risk. Is that the case for Sarepta Therapeutics (SRPT 1.00%) or Gilead Sciences (GILD 0.89%)? Motley Fool analyst Kristine Harjes and contributor Todd Campbell discuss that and more in this clip from The Motley Fool's Industry Focus: Healthcare podcast.

A full transcript follows the video.

This podcast was recorded on May 4, 2016. 

Kristine Harjes: What happens when the FDA says no to a drug that's a patient's only hope? Will dig into the story of Sarepta Therapeutics and their rare-disease drug candidate on this healthcare edition of Industry Focus. After that we're going to check back in on the hepatitis C landscape, because we just can't help but talk about Gilead Sciences. I'm Kristine Harjes, and this is Industry Focus: Healthcare.

It is May 4, 2016, and to make up for my utter lack of pop-culture knowledge a couple episodes ago, let me welcome Motley Fool healthcare contributor Todd Campbell to the show with a resounding "May the 4th be with you!" Is that better?

Todd Campbell: Hi, Kristine. How are you?

Harjes: I'm doing great. How are you doing today?

Campbell: I'm doing excellent.

Harjes: I think we've got two really interesting topics on our hands today, Todd. Are you ready to dig in?

Campbell: I am. This is going to be a fascinating conversation.

Harjes: Indeed. On April 25, the FDA's advisory committee voted against approving, it was a 7-to-6 vote, a drug made by a company called Sarepta Therapeutics. Even though this was just a recommendation from an advisory committee, which means it's not an actually denial just yet, this was a real heartbreak of a decision.

Campbell: Big time. Listen, this drug is designed to treat patients with Duchenne's muscular dystrophy, or DMD. This is a very, very tough-to-treat disease. There's no approved medicines that can curb it, and sadly most patients with it succumb to their disease in their 30s. There's a tremendous amount of emotion associated with this meeting. To back up for a second for listeners, I think everyone that's listening to the program probably knows that the FDA is responsible for approving drugs. Those approvals are based on a company's ability to show that the drug is both safe, and that it also works, or improves the condition for patients. Prior to that approval though, the FDA will convene a committee of experts to discuss the merits of the drug, and that's what we're talking about, we're talking about the advisory committee meeting at the end of April that discussed the pros and cons associated with this drug, and that sadly for patients wasn't able to put its full support behind giving this drug an early approval.

Harjes: Of course the FDA doesn't have to follow what the advisory committee says, but they usually do.

Campbell: Typically they do. This could be ... right, we're getting all sorts of exceptions and who knows, right? But this could be a scenario where they do look at the whole body of evidence and weight patient testimonials more heavily than maybe they would in other disease indications. That's based on the fact that if you listen to the FDA's comments from their head of drug development, or drug evaluation I should say, Janet Woodcock, she seemed to indicate some support for erring on the side of caution as far as approving a drug that may help this tough to treat indication. Whether or not that pans out with and FDA green light at the end of May when the official decision is supposed to come is anyone's guess, but that's what a lot of industry watchers are thinking and a lot of patients are hoping for.

Harjes: Yeah, I would agree that Janet Woodcock's commentary did seem to be the one bright spot out of this thumbs-down from the advisory committee, because she carries a lot of weight in these decisions. She made comments that were seemingly pretty positive, but the thing is this wasn't really your traditional trial. It was a trial of 12 patients; they used a "historical control group," meaning that it wasn't your standard trial where you have a treated group and a control group and you can compare them. The efficacy of this drug is a little bit questionable at this point. The other side of that coin is, it's also going to be very, very expensive, so there's that side of things to consider as well.

Campbell: Right, we're not talking about, "OK, let's approve a drug that you can go down to Rite Aid and buy, like vitamin C for $6 a bottle." This is a rare disease, it only affects 50,000 people in the world, or in the developed world, and of those 50,000 people it only targets about 13% of them. Only about 5,000 or 6,000 of these patients are amenable to the way this drug works. You're talking about a very small patient population. In preparation for today's conversation I did take a look through the briefing documents that the FDA had sent to the adcom committee prior to their review. I wanted to go over one quote because it really talks to the point you just made about the trial size and the trial design. In the briefing documents the FDA wrote, "The FDA has concerns regarding the comparability of the treatment groups and the overall persuasiveness of the historical control comparison, as described in the briefing materials. In fact the clinical course of the 12 patients participating in the study appears to be within the expected natural history of DMD."

You could see going into the adcom meeting, the FDA is saying, "OK, we've got a very small patient population. What is being reported, it's within what would be expected normally in the course of this disease, probably some periods where things are good and other periods where things are bad, so who knows whether or not this was a placebo effect where people knew they were getting the drug and they felt better because of that?"

Kristine this is a science organization, right? They've got to look at the science. They're looking to see if there's an actual scientifically provable fact that this drug improves outcomes for these patients. I think when push came to shove the adcom committee, as much as they wanted to be able to say, "Yes approve this drug," they couldn't reconcile that.

Harjes: Yeah. Emotions aside, because obviously there are a lot of emotions tide up with this disease, as an investor what would be next for Sarepta if the FDA says no come May 26.

Campbell: Right, there are a couple options here. May 26, the FDA is going to give their official go/no-go. If they say go, they'll probably require a confirmatory trial. Likely every patient that's available for this drug in the U.S. if it's approved is going to take it. There's no approved treatments, this is a devastating disease, so you're talking about a patient population of a couple thousand probably in the U.S. Who knows what the pricing of this drug could be -- rare-disease drugs often times they'll carry six figure price tags, they'll price at $100,000, couple thousand people take it that's $200 million in sales. The market cap in this company though is already $834 million. Investors need to think about that, is this already pricing in the potential for approval.

If the FDA gives a no-go decision, then Sarepta's in a tough spot, because it has to say, "OK, do we now invest in a placebo controlled study that is going to cost us a lot of money and could take one, two years before we can get back in front of the FDA." Maybe, maybe not. We don't know how that's going to play out. They have $192 million in cash on the books and their operating expenses were $220 million last year. I'm not sure; this is a risky stock in my view.

Harjes: Extremely risky. This is definitely a make-or-break kind of story.

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All right -- second portion of the show we wanted to talk more about the hepatitis C landscape and Gilead Sciences.

Campbell: Shocking, right?

Harjes: Have you heard of Gilead before, Todd?

Campbell: Yeah. Listeners know we talk about this stock a lot. Let's explain for a second why.

Harjes: I think that's a good idea.

Campbell: Gilead Sciences is a massive ... it's one of the largest biotech companies, if not the largest biotech company. They do $30 billion in sales and they market two hepatitis C drugs, that, if you combine the sales of those, make it the biggest selling on the planet and outpaces AbbVie's Humira by a couple billion dollars a year in sales. We're talking about a massive story. That's why we spend a lot of time talking about it.

Harjes: Yeah, I would say it's the Apple of healthcare.

Campbell: That's a great analogy, yeah. Yeah, absolutely. Gilead Sciences reported their first-quarter earnings results, and it had a couple surprises.

Harjes: Yeah, this is the first disappointment in a while, that I can remember.

Campbell: Right. I think industry watchers were leaning for earnings per share of, I want to say it was $3.14, something like that. They ended getting $3.03, and that's not normally what happens. Usually Gilead Sciences sandbags, quote on quote, the projections so that they can under-promise and over-deliver. That didn't happen this time.

Harjes: Yeah, most of the disappointment stemmed from their hepatitis C franchise, in which product sales decreased 6% year over year, to $4.3 billion, which is still an enormous amount. That was largely driven by a decrease in Harvoni sales, which is one of the hepatitis C drugs within the United States.

Campbell: Yeah, it was all Harvoni. There's no getting around it; it was all United States. Sovaldi's sales increased and Harvoni's decreased. The reason behind that is competition, competition, competition. A couple years ago, when Gilead Sciences first launched these drugs, it had a monopoly, so it priced these drugs at $84,000 for Sovaldi, $94,000 for Harvoni. But since then, you've got AbbVie launching Viekira Pak, you've got Merck launching Zepatier earlier this year, and as a result there's a price war.

Harjes: Yeah, actually I kind of think that that's almost a secondary force happening right here. Maybe secondary is not the right, like a preliminary force. When I was reading through this earnings call I broke it down into four major reasons why we saw this decline, and of course what management is saying. They highlight first expanded access, which triggered lower price points as per prior negotiations. They had these contracts with their payers basically saying, "If you provide the drug to more people, then we'll give it to you cheaper," which, the economics of that make sense. That's what we saw, is that there was this expanded access, and it triggered the negotiated prices to get lowered.

Second item is that they expanded their reach into lower cost segments, like the VA. Third, shorter treatment duration, a lot more patients were taking it for eight weeks as opposed to a longer 10- or 12-week cycle. The fourth thing is foreign exchange, which, I like to ignore that, because it doesn't really mean much for the business itself, but that did affect HCV revenue by 8% year over year. I think those four things, well, three out of four, are somewhat driven by competition, but they're also not really as menacing and bad as competition would imply. This is a company that still has really, really strong market share, 90%-plus. They're seeing broader access to people that are not quite as sick and therefore are seeing lower price points.

Campbell: Right. I guess that's the natural progression of the market, right? First you have massive warehousing of patients who are the sickest and then those patients get treated, and once you've worked through those patients then you could start to expand it to other people. But when you're talking about an indication that affects 3 million people here in the United States, 150 million people globally, or some estimates are higher than that, you're willing to cut the price a little bit in order to make sure that everyone who is infected can get access to this treatment. If you look at what's happened since Sovaldi's approval in 2013, I think it's roughly a million people have been treated with hepatitis C drugs, 800,000 roughly have been treated with Gilead Sciences' version of those drugs.

Obviously you want to get to a situation where you're able to treat as many of these people as possible, so that you don't see as dramatic a drop in revenue as your price is forced down. If Gilead Sciences was able to get $70,000 or $60,000 for their drug prior to Viekira Pak, then they were able to get 50 to 60 after Viekira Pak, and now they're getting 40 to 50, now that there are multiple competitors on foot. You need to offset that by treating more patients. I think that that's an important for investors to remember, is that major indication, opening it up to a larger patient pool, and that doesn't even include the potential for China. One of the things that investors should also recognize is that this drug is not available yet in China, Gilead Sciences' drug is not available in China yet, and Sovaldi could theoretically make it out to the market there as early as 2017. That could be tremendous.

Harjes: China has a market of 10 to 20 million people that have hepatitis C, that are known to have hepatitis C.

Campbell: Yeah, it's tremendous. Now who knows what the pricing will be there. Everybody's going to be lining and submitting a bid and saying, "Approve my drug, approve my drug. I'll give you the best deal." You talked about the VA. The VA has had some funding issues when it comes to paying for hepatitis C drugs that weighed down a little bit of Gilead Sciences at the end of the year. There probably was some warehousing that came through in the first quarter now that funding has become available again. Not sure whether or not, they'll probably level out throughout the rest of the year. I think investors should be looking at this and saying, "OK, yeah, there's a little bit of a hiccup because of these issues but you're still talking about a $16 billion per year business for this company. You're still talking about a company that's generating out $4 billion in profit per quarter. This is far from a company that's struggling.

Harjes: This is also a company that has quite a bit of cash on the books -- $21 billion at last count.

One of our listeners wrote in to This is Mark Fitzgerald of Burlington, Vermont. He wrote in asking, pretty much what Gilead plans to do with all this cash, and whether an acquisition might be in the cards. What do you think Todd?

Campbell: That's a $21 billion question.

Harjes: It's exactly what it is.

Campbell: Yeah, they have a ton of cash. The funny thing is that cash is after they bought back $8 billion worth of their own stock last quarter.

Harjes: They have been incredibly -

Campbell: ... buy back $8 billion and still have $21 billion in the bank.

Harjes: I'll note, before we move on from that, that was at an average price $92.09 per share, which is 7.6 times 2016 earnings. They're getting their own stock back really, really cheap and they've absolutely implied that they think their own company is the best deal on the market right now, which is why we haven't seen a splashy acquisition.

Campbell: Right, I mean if you're looking at it and you're saying, OK, you've got companies out there [...] is one that we talked about in the past, that theoretically could be up for sale, that Gilead could walk in and say, "I want to expand into cancer drugs, I'll make a bid for this company." But they're also looking at it and saying, "If management or the board wants too much for that, why don't I just take that money and pour it back into my own stock. I've still got a great business, I can buy it cheap."

Harjes: Yeah, since 2012 they've repurchased 17% of their shares outstanding. I do think that they are looking for external opportunities as well, but for now they don't think they can do any better than Gilead.

Campbell: Right, they're looking for the right deal at the right price. Their oncology team has suffered a few blows recently because Zydelig's trials got halted because of some safety concerns, and their oncology head has since left. You've got a situation now where they're trying to figure out, "Where do we want to go from here?" While they figure that out, why not just spend that money on dividends and buybacks, right? They increased their dividend by 10%, so they've got plenty of money kicking around that they can use to reward shareholders and that they can continue to plow back into their own drug development. They're working on a drug for NASH, for example, which is another liver disease that could be a huge indication. I think they're spending $3 billion in R&D, so they've got plenty of money kicking around that they can use for future growth.

Harjes: Seems like our answer is pretty much the answer that management actually gives when questioned about this, which is that they'll make the right move when the right opportunity comes. Thanks for helping me answer this one Todd. If any of other listeners have questions for us feel free, write in at 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.

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Sarepta Therapeutics, Inc. Stock Quote
Sarepta Therapeutics, Inc.
$75.71 (1.00%) $0.75
Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$62.36 (0.89%) $0.55

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