Is There a Balm for Gilead?

September 1, 2010
Walter Armstrong

Pharmaceutical Executive, Pharmaceutical Executive-09-01-2010, Volume 0, Issue 0

A new leader, a big acquisition, and a bold investment in HIV may all be in the works at Gilead. But what will it take to restore the glory days?

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").

Kevin Young, Executive VP, Commercial Operations, Gilead

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.

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."

Gilead’s HIV Fixed-Dose Franchise: The 10-Year Forecast

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

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."

Gilead’s Pipeline

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."

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.

Gilead’s 2009 Report Card from AIDS Activists

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.

Molecules and Marketing

Yet as a relative latecomer to the HIV field—albeit armed with "one great molecule and one brilliant insight," in Sanford C. Bernstein biotech analyst Geoffrey Porges's words—Gilead has always depended on the power of marketing. Its one great molecule, Viread (tenofovir), was a 2001 entry into the crowded class of nukes (nucleoside/nucleotide reverse transcriptase inhibitors) that added value because it was the first once-daily HIV pill. For patients who were used to gulping down a handful of pills, Viread helped meet the critical goal of improving adherence—and, therefore, averting viral resistance and treatment failure.

After swiftly buying a second nuke, Emtriva (emtricitabine), Gilead set into motion its make-or-break plan to wrest the market from GSK's grasp. The biotech bundled Viread and Emtriva into a single pill and in 2004 launched it as Truvada—against the reigning double-nuke fixed-dose, GSK's Combivir, which had become the go-to base for building HIV cocktails. Once-daily Truvada was not only a simpler regimen than twice-daily Combivir—it also proved to be a little more potent and a lot more tolerable.

Given these advantages, Truvada was eventually favored to depose Combivir as the top-selling HIV drug. But Gilead took the fast lane not only by spending major money on a marketing campaign but also, according to false-claims lawsuits filed by several Gilead whistleblowers, by paying doctors $2,000 to $3,500 for each patient they switched from Combivir to Truvada—even patients whose virus was currently in check—under the guise of enrolling them in a new study. Recalcitrant physicians received further enticements such as luxurious trips for "speaker training." Gilead's speakers bureau bulged with 360 doctors, although half gave no talks at all.

This may all be par for the course in pharma marketing, except that in HIV treatment, switching patients from one combination to another is a very risky business. Still, as Jim Edwards wrote in reporting the story on his BNet pharma blog in 2009, after the plaintiffs dropped the lawsuit following the Department of Justice refusal to intervene, "One must also assume that the case was not that strong or was otherwise flawed—in other words, it's wise to give Gilead all the benefits of the doubt."

When asked about the suit, Gregg Alton, Gilead's head of corporate and medical affairs, says, "I was involved in that launch and we did everything in the most ethical way possible. No one is more honest than Kevin Young. But when money exchanges hands between doctors and pharmaceutical companies, the lines can get fuzzy."

A doctor who was witness to the Truvada marketing campaign and who asked not to be named says, "The suit should have gone forward."

HIV Profits, Patents, and Products

In the last quarter of 2009, Atripla (up an annual 51 percent to $2.4 billion) outpaced Truvada (up an annual 18 percent to $2.5 billion) as the best-selling product. Even Viread, one of many single compounds long surpassed by the fixed-dose standard, eked out a growth spurt (up 7 percent to an annual $667.5 million)—only slightly below the market average of 10 percent. But between patent expirations (Viread's ends in 2017) and pricing pressures, the HIV market is expected to begin to decline between 2015 and 2019, according to Datamonitor.

Early ripples are already issuing. Gilead recently had to lower its 2010 total-sales projections by 10 percent to $7 billion, a result of federal cost containment. To the generous price concessions of 15 percent that Gilead already offers ADAP patients, including discounts and freezes through 2013, the government will tag on another 8 percent. As for patent erosion, with BMS's Sustiva losing exclusivity in 2013, Atripla faces a stormy future from generics. This prospect sparked Gilead to license Tibotec's experimental non-nuke rilpivirine for a new fixed-dose formulation with Truvada. A marketing effort to switch Atripla patients to the new combo could limit the damage to Gilead's bottom line.

But the Quad is Gilead's extravaganza—a once-daily pill containing Truvada plus two in-house experimental compounds, the integrase inhibitor elvitegravir and the PK booster Cobicistat. "We're likely to see the Quad take away from some sales of Atripla," says Kevin Young. "Atripla was a fundamental step change in HIV, and over half of all people with HIV are taking it. Now the Quad will offer a fundamental step change over Atripla." So eager is Gilead to do so that it has even bankrolled a head-to-head trial showing that the Quad and Atripla have comparable efficacy. But the Quad will also vie with combinations containing Merck's first-in-class integrase inhibitor, Isentress. "It's too early to tell how elvitegravir compares with Isentress," says Datamonitor healthcare analyst Nele Jensen. "Gilead may have decided to coformulate it with Truvada because it's not as effective. We don't expect elvitegravir to do well as a standalone because a third integrase from Glaxo showing impressive data is expected in 2016."

Gilead has won the praise of activists for developing Cobicistat, a welcome alternative to Norvir, whose side effects are legion. Says ATAC's Jeff Taylor: "Gilead should be congratulated not only for taking on this niche but for committing to marketing it as a single agent. They refuse to play the Abbott game of bundling it with only its own drug so as not to make it available for use with other combinations." If Cobicistat lives up to its expectations, HIV doctors can be expected to dump the Abbott booster with a vengeance.

Gilead also gets high marks for its pricing and access practices in the developing world. In 2006, it started offering licenses to 13 generic drugmakers in India to produce copycat Viread and Truvada for sale in the developing world (excluding key emerging nations). "The bigger pharmas may not have liked what we did—giving away patents—but that's Gilead's way of doing things differently," says Young. By the end of 2009, only three of the Indian knockoff firms had received approval for Gilead drugs, although the number of people in the developing world on Viread-based drugs had risen to 700,000, split about equally between brands and generics. Eager for more progress, Gilead began talking up UNITAID's proposal of a patent pool among other HIV drugmakers, and at July's International AIDS conference in Vienna it was reported that Gilead, Tibotec, and BMS were warming to the once-radical notion of giving their patents away for free to help stop the still-exploding global epidemic.

Yet the great unmet medical need in HIV is among people who have burned through all their options. With viral suppression a lifelong necessity, drug failure is almost inevitable—and a growing number of patients are at the end of their treatment hope. "What Gilead is coming out with is great, but it would be greater if they had produced a drug with a unique resistance profile," says Taylor. "That's why the GSK integrase inhibitor is so important to the HIV community."

The GSK integrase inhibitor that has tongues wagging is the centerpiece of the pipeline at ViiV Healthcare, a joint venture between Pfizer and GSK, which has 85 percent control. With $2.4 billion sales expected in 2010, ViiV isn't an immediate threat to Gilead, but it has five compounds in Phase II, including the anti-integrase agent promising high potency, low toxicity—and a unique resistance profile. With sufficient backing, ViiV could enable GSK to win back some of the turf it ceded to Gilead.

What's the Deal, Gilead?

Gilead hasn't always had the Sidam touch when it comes to M&As. Its 2001 acquisition of Triangle Pharmaceuticals for $464 million delivered the experimental nuke Emtriva that Gilead would so profitably combine with Viread to make Truvada. "That acquisition was one of the two or three best in all of pharma history," says Leerink Swann's Schimmer. "You now have to give the management team the benefit of the doubt."

In the past four years, however, Gilead has spent a total of $4.5 billion on four acquisitions, with little to show for it. In 2006, the biotech shelled out $2.5 billion to nab Myogen, whose drug for pulmonary hypertension, Letairis, was in line for FDA approval. But the presumed prize was Myogen's other endothelin receptor antagonist, Darusentan, for the 2 million patients with untreatable high blood pressure. However, after two Phase III trials failed, Darusentan—and its blockbuster potential—were toast. In turn, the logic behind Gilead's $1.4 billion purchase of CV Therapeutics, a cardiovascular biotech whose small sales force was to be leveraged to peddle Darusentan, appeared to crumble.

Not all the news is grim. Letairis, hampered by a slow launch, has recently begun to pick up steam, and in February, Cayston, an inhaled antibiotic for lung infections in people with cystic fibrosis, received its long-awaited FDA approval. In June, Gilead paid $120 million for CGI Pharmaceuticals, whose library of kinase inhibitors had first attracted Genentech. The lead product targets a spleen tyrosine kinase with therapeutic potential for rheumatoid arthritis. An Enbrel-launch veteran, Kevin Young is well versed in the markets for inflammatory diseases, should CGI's molecules, all preclinical, ever see the light of FDA regulators' eyes.

While stalking virgin disease territory, Gilead has also staked out a potential spot in hepatitis C, a disease common among patients with HIV. Once again, Gilead is playing Johnny-come-lately to a burgeoning market—one that could reach $5 billion by 2015, according to Needham & Co. analyst Alan Carr. "Hepatitis C is a promising option for Gilead—it's antiviral, fixed doses, HIV overlaps," he says. "But they need to move fast."

Both Vertex and Merck already possess protease inhibitors whose Phase III data shows a cure rate of up to 75 percent in patients who failed other therapies. Yet even with effective drugs almost ready for prime time, R&D innovations could produce better, safer drugs. "We have seven molecules in the pipeline," says Young. "They will not be the first, but we have an advantage in terms of fixed-dose combinations—and we'll be testing only the very best." In April, however, Gilead hit its first C bump when a Phase II caspase inhibitor had to be shelved due to liver toxicity. Fortunately, two other Phase II candidates still have life.

A Golden or Gilded Gilead?

Gilead has the money and the time to more sagely execute a diversification plan. And Wall Street will be breathing down its neck every step of the way. "Once you get to be the size of Gilead, in terms of market cap, it becomes very hard to move the needle without a major acquisition or a major investment in R&D," says Miller Tabak's Funtleyder.

Yet even in the firm's specialty, a fledgling entrepreneurial spirit is raising the bar once again. With potential market disruptions in the works—say, from ViiV's integrase inhibitor, BMS's attachment inhibitor, or TaiMed Biologic's entry inhibitor—Gilead seems to recognize that a redoubled R&D effort will be required to avoid becoming an HIV has-been. "We're committed to staying the course in HIV," says Young. "And while we're agnostic about where innovation comes from, we do have preclinical programs in novel classes." Gilead has also established an in-house HIV Cure Project, with scientists focused exclusively on the once-and-future dream of viral eradication.

Asked about the CEO speculation, Young is appropriately noncommittal. "All I can say is that every morning I see Gilead's management team of John Martin, John Milligan, and Norbert Bischofberger come to the office, roll up their sleeves, and get to work as hungry as ever."

Whichever growth path the HIV powerhouse follows, it will take much more than shedding its leadership skin to remain exceptional. For one thing, the firm needs to pay less heed to its stock value and more to the value of the molecules in its pipeline. It may also have to learn to outgrow—rather than keep trying to outperform—its own reputation as a phenom. Says Peter Tollman, Boston Consulting Group's global biopharma leader: "Every extremely successful company needs to be able to recognize when their winning strategy has run its course—and then come up with a new one that's sustainable based on data about their current competitive position and opportunities."

Young's commercial experience at Amgen might even bust Gilead out of its small-molecule mindset and into the brave new world of biologics. We don't feel overanxious that we have to do a big acquisition," says Young. "We prefer to do early-stage deals, where we can develop the compounds ourselves. That kind of innovation is what we've always been good at."

Related Content:

Strategy | R&D/Clinical Trials