Gilead’s Race for a Cure

Hepatitis C is a contagious viral liver disease, accounting for up to 4 million new cases and more than 350,000 deaths annually around the world, providing enormous impetus for a company to find a cure. Below, we look at one such drug company that’s poised for medical success—and investment payoff.

In about a quarter of cases, the disease causes an acute illness that the body is able to clear. However, in between 75 percent and 85 percent of cases, the virus lingers in the body and causes a chronic illness, with an estimated 3.2 million patients in the US and 150 million patients worldwide suffering from the chronic form.

For patients suffering from chronic hepatitis C, the disease can cause severe liver damage over a period of years which can ultimately lead to liver cancer or total liver failure. Between 1 percent and 5 percent of patients diagnosed with the disease will eventually die of either cirrhosis caused by the disease or liver cancer.

The current standard of care of these patients is a combination of the retroviral drug ribavirin and interferon, a drug that boosts the immune system’s ability to combat viruses. While the treatment ultimately cures more than half of patients, the drugs are expensive and can cause severe side effects such as anxiety, depression and debilitating flu-like symptoms over a course of treatment that can run as long as a year. Those side effects often become particularly intense after about three months of treatment.

As a result, many patients find the treatment worse than the disease and while some types of interferon can be injected weekly, others must be injected daily. That makes it difficult to ensure patient compliance with the drug regime. On top of that, given the expense of the current treatment, many patients in less affluent countries are simply priced out of the market.

Given the large addressable global market and the potent! ially debilitating side effects caused by current treatments, more than half a dozen companies have been racing to develop a more effective treatment for hepatitis C for several years.

One of the first to market with a new, more effective treatment for the disease was Vertex Pharmaceuticals (NSDQ: VRTX). Its drug Incivek (telaprevir) was approved by the Food and Drug Administration in 2011 and went on sale in May of that year after studies found that patients suffering from a particular genotype of the disease responded more quickly and effectively to the standard treatment of interferon and ribavirin with the addition of Incivek.

Incivek quickly became a $1 billion drug, but by the end of 2011 sales were dropping off. While Incivek shortened the length of treatment and helped to achieve a better cure rate, it still required the administration of interferon injections, the main culprit behind the side effects. Because of that—and the promise shown by other hepatitis C treatments in development—many patients opted to end or delay treatment.

As a result, sales of Incivek fell by 66 percent in the third quarter of this year alone to just $85.6 million and Vertex posted a net loss of $0.54 per share. On top of that, the all-oral, interferon-free hepatitis C treatment the company was developing was put on hold by the FDA in July after three patients showed signs of liver damage.

At the same time, Abbvie (NYSE: ABBV), Bristol-Myers Squibb (NYSE: BMY) and Gilead Sciences (NSDQ: GILD) were all posed to launched their own all-oral, interferon-free treatments, with Gilead appearing to have won the race.

Just a couple of weeks ago, an advisory board to the FDA that examines new drug applications and then makes recommendations to the agency as to whether or not the drugs should be approved recently voted unanimously to recommended that Gilead’s drug sofosbuvir be approved.

Even better, the board recommended that sofosbuvir, in combination with ribavirin, b! e approve! d for the treatment of four of hepatitis C’s six genotypes.

While the FDA isn’t bound to follow the guidance of the advisory committee, it very rarely goes against it, particularly when a drug receives a unanimous vote, so sofosbuvir should receive FDA clearance within the next month or so.

The same advisory committee also recommended Johnson & Johnson’s (NYSE: JNJ) hepatitis C drug simeprevir for approval but that endorsement came with some caveats, clearing the way for approval to treat only one genotype and in combination with both interferon and ribavirin. As a result, it isn’t likely to prove a huge competitor for Gilead’s sofosbuvir.

On top of that, trials are still underway to determine how many hepatitis C patients clear the virus using the combination sofosbuvir and ribavirin, particularly those who are also infected with human immunodeficiency virus (HIV), a common co-infection.

If the studies show that patients can clear the virus in 12 weeks, particularly those also infected with HIV, using the combination treatment will give it a significant leg up in the market. Patients who respond within that time frame are usually considered to be cured.

It’s currently estimated that sofosbuvir will likely generate about $5 billion in revenue for Gilead based on just the currently expected approvals, but if it clears that 12-week hurdle that number could easily move closer to $7 billion as it would become the preferred hepatitis C treatment for most patients.

That will be a huge revenue boost for the company, which has already been showing strong growth. In the third quarter, revenue grew by 15 percent to $2.8 billion, largely due to the recent launches of two other new drugs. It will also provide significant diversification to a company that currently generates nearly three quarters of its revenue from HIV treatments.

So while Gilead has had a huge run over the trailing year with shares up by 111 percent, it appear! s to have! ample upside left. Despite its current trailing price-to-earnings (P/E) ratio of 39.2, it is still at a discount to its industry average of 59. Its current price-to-earnings growth ratio is also just 0.8, suggesting that it still offers a fairly compelling value.

Already a dominant player in the HIV market, Gilead Sciences’ strong entrance into hepatitis C treatment makes the stock a solid buy up to 85.