November 12, 2013

Gilead Targets Hepatitis C

Published: 11/12/2013
By Benjamin Shepherd, Editor, KCI Investing
KCI Investing
Tickers mentioned: GILD

Hepatitis C is a contagious viral liver disease, accounting for more than 350,000 deaths annually around the world, providing enormous impetus for a company to find a cure; below, we look at one drug company that's poised for success, says Benjamin Shepherd, editor of Money & Medicine.

The current standard care for patients with chronic hepatitis C 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.

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 potentially 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.

An advisory board to the FDA that examines new drug applications voted unanimously to recommended that ofosbuvir be approved; the drug was developed by Gilead Sciences (GILD).

Even better, the board recommended that sofosbuvir, in combination with ribavirin, be approved 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 soon receive FDA clearance.

Meanwhile, 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% 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%, it appears 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.


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