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Gilead Sciences (GILD): A Look At Undervalued Opportunities In HIV Space

 January 09, 2013 10:48 AM

(By Mani) Gilead Sciences, Inc. (NASDAQ: GILD), a biopharma company with a primary focus on anti-infective therapies has significant undervalued opportunities related to its fixed-dose combination (FDC) strategy in HIV franchise.

The company has achieved market leadership in HIV through the development of key backbone therapies Viread and Emtriva and their exclusive co-formulation with other drugs to create fixed-dose combinations (FDCs).

By combining multiple pills into one, Gilead improves compliance, a major issue in HIV treatment and creates a significant advantage over competitors' multi-pill regimens.

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Bristol-Myers Squibb Co.'s (NYSE: BMY) Sustiva, a component of Atripla, faces patent expiration in the next few years, which would result in gross margin improvement for Gilead. Factoring in pediatric extension, Sustiva's composition of matter patent expires at the beginning of 2014, and its less defensible method of treatment patent expires in the first half of 2015.

"When a generic version of Sustiva does emerge, Gilead will no longer be bound to pay BMY for Sustiva's ~$1.2B portion of annual Atripla sales, except for a three-year step-down royalty," Oppenheimer analyst David Ferreiro wrote in a note to clients.

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Gilead could substitute the company's own generic Sustiva while potentially maintaining Atripla pricing. This transition would ultimately result in about 10 percent gross margin improvement, as Gilead books all Atripla sales and pays out Bristol-Myers through cost of goods sold.

"Effectively, the generic Sustiva substitution would increase cash flow by ~$1B until Atripla patents expire in 2018/2021 in the EU/US, respectively," Ferreiro said.

In addition, Gilead has FDC partnerships similar to the Atripla collaboration with Bristol-Myers. Gilead, with Johnson & Johnson (NYSE: JNJ), is developing an FDC consisting of JNJ's Prezista with Gilead's Emtriva, cobicistat, and GS-7340.

As GS-7340 is a prodrug of Viread and the other FDC components are proven drugs, the FDC is expected to reach the market successfully in the 2016 time frame.

Like Sustiva, Prezista is a blockbuster with $1.2 billion in 2011 sales and would lose patent protection prior to the FDC. In another partnership, Gilead has licensed cobicistat to BMY to develop an FDC with BMY's Reyataz. Note, this is not a complete regimen as another pill (i.e., Truvada) is required, as well.

"We believe following cobicistat's approval next year, a bioequivalence study would be sufficient to support approval of the FDC," Ferreiro said.

Reyataz is also a blockbuster generating $1.5 billion of sales in 2011 and expires prior to cobicistat. These partnerships beg the question of when Prezista and Reyataz go generic, could Gilead cease to pay out sales to Johnson & Johnson and Bristol-Myers, respectively, and substitute its own generic Prezista and Reyataz into their respective FDCs. Doing so would clearly result in significant cash flow acquisition.

"Gilead would acquire at least ten years of Prezista cash flow, whereas Gilead is acquiring only ~six years of Sustiva cash flow (and only ~three in the EU)," the analyst noted.

It should be noted that Prezista orange book composition/method patents expire from 2013 to 2017 while the FDC will not expire until 2028, with cobicistat. Additionally, Prezista sales are still increasing at double-digit growth and are positioned to exceed Sustiva and Reyataz in sales.

Moreover, Gilead has more aggressive pricing opportunities as FDCs offer competitive advantages through differential pricing. An example of this is with Abbott's (NYSE:ABT) Norvir.

Norvir is currently the only booster on the market and is needed for most available protease inhibitors. Thus, Abbott allowed only Norvir to be co-formulated with its own protease inhibitor, lopinavir, to create the FDC Kaletra. Abbott increased the price of Norvir by 400% overnight while maintaining the price of Kaletra. This increased the cost of competitor protease inhibitor regimens, driving market share toward Kaletra.

"Gilead is in an even more central position as it owns Truvada (Viread+Emtriva), the key backbone drug that is used in most HIV cocktails," Ferreiro wrote.

By co-formulating Truvada with other drugs, Gilead has developed the only complete single-tablet regimens on the market (Atripla, Stribild, and Complera). Similar to Abbott, Gilead could increase the price of Truvada while maintaining the price of its single-tablet regimens. This would be detrimental to all HIV competitors across drug classes.

Gilead has yet to capitalize on such aggressive pricing strategies. It is important to consider the consequences of dramatic price increases. Abbott faced negative publicity from patient advocacy and physician groups, as well as several lawsuits from payors, competitors, and physicians. Despite the pressure, Norvir pricing remains high.

"We note Gilead has three single tablet regimens on the market and is developing two in the pipeline (Prezista+cobicistat+GS-7340+Emtriva and elvitegravir+cobicistat+GS-7340+Emtriva),offering great pricing flexibility," Ferreiro noted.

Interestingly, based on company discussions, Gilead will likely employ an aggressive differential price strategy in HCV, by employing a high price for GS- 7977 that is close to the price of the GS-7977+GS-5885 FDC. This will dissuade the development and use of GS-7977 with competitor drugs.



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