Is There a Balm for Gilead?

Sep 01, 2010

Kevin Young, Executive VP, Commercial Operations, Gilead
Gilead Sciences has had, for most of its short life, what would seem to be the Midas touch. Since launching its first HIV drug in 2001, the Foster City, Calif., company has captured more than half of the disease's $11 billion market, playing a cunning David to GlaxoSmithKline's distracted Goliath. Over the past five years, total sales have quadrupled to $7.1 billion in 2009, with the antiviral franchise contributing $5.8 billion. Its stock has outperformed even Google's. A model of the high-yield specialty shop, with a low R&D investment and a small sales force, the company's productivity—every buck spent on sales reps reaps $7.30 in earnings—is the envy of the industry. Its $30 billion market capitalization protects it from all but the richest merger-mad pharmas (Johnson & Johnson is said to be sniffing). Last year Gilead led Businessweek's list of Top 50 companies, and its exceptionally tight asset management earned it the top spot in Pharm Exec's Industry Audit for the second straight year (see "Pharm Exec's Ninth Annual Industry Audit").

Remarkably, the biotech's meteoric rise has been without a single first-in-class innovation. It launched its first HIV drug, once-daily Viread, a full five years after protease inhibitors had performed deathbed miracles and begun to bring the runaway epidemic to heel. Simplifying HIV treatment with fixed-dose formulations, culminating in Atripla—the first one-a-day triple-drug pill and a high-watermark in HIV treatment—was Gilead's quick and canny strategy to market domination.

Gilead’s HIV Fixed-Dose Franchise: The 10-Year Forecast
AIDS activists have generally cheered Gilead on. In producing Atripla, the biotech formed an unprecedented collaboration with Bristol-Myers Squibb to combine its non-nuke Sustiva with Truvada, Gilead's own Viread-based combo. Currently, 80 percent of people with HIV in the developed world start treatment with Atripla, Truvada, or Viread. Jeff Taylor, the AIDS Treatment Activist Coalition's (ATAC) liaison to Gilead, says: "Gilead revolutionized HIV care with its fixed-dose combinations. To make the first once-a-day treatment it had to go outside its comfort zone with BMS. And now its expected to do it again with Tibotec's rilpivirine."

Yet even as Gilead is feted by the ATACs and the Businessweeks, Wall Street is turning against the firm. Unable to sustain its sharply rising rate of sales growth, Gilead stock has been bloodied, plunging to its current $35 after peaking in late 2008 at $57. Its late-stage HIV pipeline, particularly the four-in-one "Quad," can succeed only by cannibalizing its current crop. That zero-sum dynamic, coupled with the fact that its profits depend almost entirely on its HIV franchise, has cast Gilead in the role of the proverbial one-trick pony.

Time to Take Stock

Gilead’s Pipeline
In attempting to draft a second act, the biotech's veteran management team led by CEO John Martin has made a series of uncharacteristic blunders. Its patchwork foray into cardiovascular and respiratory niches by way of expensive acquisitions has all but collapsed. In a recent earnings call to analysts, Martin downplayed these troubles by emphasizing the company's early-stage hepatitis C pipeline. "Gilead was one of the most respected stocks in all of healthcare," says Les Funtleyder, an analyst at Miller Tabak. "But now this golden company that could do no wrong is having hiccups in a market that is very unforgiving. It's a victim of its own success."

Yet with Gilead's HIV franchise poised to mint $5 billion a year for most of the next decade, analysts like Leerink Swann's biotech expert Josh Schimmer remain bullish. "Their stock is undervalued, especially given their cash flow," he says. "They have more than enough time to innovate or diversify. It's definitely a box they are in—a very desirous one."

Doing its best to buoy its stock value, Gilead announced in May a series of buybacks worth $5 billion. Yet the more notable activity involving Gilead stock may be that CEO Martin has sold more than $100 million worth of his holdings over the past two years. While there's nothing unseemly about such personal financial management, it may indicate a less than exuberant assessment of his company's future. It might also suggest an assessment of his own future at the company. "Gilead may have decided that it's time for new leadership," says Jan Heybroek, president of the Arcas Group. "Martin has been an extraordinary success. But it can be a very tough proposition to break out of old habits developed over decades of focus on one therapeutic area."

Gilead’s 2009 Report Card from AIDS Activists
If Martin is indeed stepping down, Kevin Young, the head of commercial operations, may be his designated successor. If not exactly young (he's 52), his experience launching products in diverse markets could be a key asset. He came to Gilead in 2004 after 12 years at Amgen, where he rose to lead the Inflammation Business Unit, relaunching Enbrel for rheumatoid arthritis and other indications. Having helped run Gilead's HIV business for six years, he can now be presumed to protect the firm's crown jewels while mining in new, unfamiliar areas.

Asked why Gilead recruited him, Young says, "The company was at a point when it was preparing to launch Truvada. I think the management team recognized that it needed to build up its commercial expertise to match that of its R&D expertise." Given that Gilead's leadership troika—CEO Martin, COO John Milligan, and CSO Norbert Bischofberger—are all scientists, placing a commercial guy in the top spot would seem to mark a new era.

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