Biotech Values

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The Profit Pill (GILD)

[This article could be entitled, “A Short History of Gilead Sciences.” It contains essentially the same info as in #msg-34008977 with a little added color. See #msg-35447718 for related info.]

http://www.forbes.com/2009/03/23/hiv-aids-gilead-business-health-care-viread.html

›By Matthew Herper
03.23.09

When Gilead Sciences started testing the AIDS drug Viread 12 years ago, it didn't look like a potential blockbuster. The drug wasn't a medical breakthrough, and Gilead would be taking on the world's most powerful drug companies in a crowded market.

Today Viread is taken by eight out of 10 newly diagnosed AIDS patients, usually as part of two combo pills that Gilead sells. Its combined sales last year were $4 billion. Gilead didn't introduce a totally new drug class based on stunning biological insight, as Glaxo did with AZT (the first AIDS drug), Merck with its cholesterol drug Mevacor or Genentech with Avastin for cancer. But it made HIV drugs more convenient and less horrible to take. Gilead liberated patients who once had to take as many as a dozen pills scattered throughout the day. Now some can take one daily pill that contains all three of the drugs needed to control the virus.

This has given Gilead a $40 billion market capitalization, bigger than that of Eli Lilly, whose sales are four times greater. Over five years its stock has outperformed those of Google, Exxon and every big drug company except for Celgene. 'What's still unappreciated,' says Gilead Chief Executive John Martin, 'is that you want to simplify therapy so people take all the pills. If you take a partial dose, the virus develops resistance and comes back.'

Big drug makers like Pfizer and Merck are in trouble. They are shedding jobs, failing to get new drugs approved and doing big mergers out of desperation. But Gilead's success shows that the old-fashioned pharmaceutical model of finding the right chemical pill and deploying your sales force to tell doctors about its advantages isn't dead yet. Pinpoint a more convenient, safer medicine for chronic diseases--even if you didn't invent the concept--and you can still make a mint.

Since 2004 Gilead's sales and profits have quadrupled to $5 billion and $2 billion, respectively. Gilead is the most efficient drug company at pulling in cash, generating $1.5 million of revenue per employee, triple the Merck number. The vast majority of this income comes from Viread and the two combo pills that contain it, Truvada and Atripla.

Martin bristles at the idea that what he does is old-fashioned pharmaceutical salesmanship. 'It's not marketing; it's medicine,' he says. 'You have to have the right pills, and we were able to do it with Viread.' Call it whatever you want; it works, and somehow Gilead has also managed to be just about the only drug company that hasn't irked anti-corporate protesters, largely because it is seen as receptive to their concerns. Geoffrey Porges, the biotech analyst at Bernstein, says Gilead 'is based on one great molecule and one brilliant insight.'

The insight? Starting in the mid-1990s, researchers realized they could keep the human immunodeficiency virus in check if they attacked it with three drugs at once. At that point, Martin realized, AIDS became a chronic disease, and side effects and convenience started to matter as much as efficacy. Now the challenge is to build on that success in an industry where few companies manage second acts.

Martin was lured from Bristol-Myers Squibb in 1990 to head Gilead's research. He had been fighting HIV almost since the virus first appeared. When Bristol merged with Squibb, it had abandoned a promising collaboration with Czech and Belgian researchers. Martin brought the research with him, and refocused Gilead away from gee-whiz science projects to classic drug chemistry. [Among the “gee whiz” programs was GILD’s work with aptamers, which was out-licensed to Archemix and Eyetech.]

Michael (Mick) Hitchcock, another former Bristol guy, came along for the ride. Martin and Hitchcock had worked together on D4T, Bristol's AZT competitor. At that time 90% of patients were on one of these two drugs, which had to be taken twice a day and caused side effects such as a ghastly gauntness in the face, anemia (AZT) and liver damage (D4T).

Martin and Hitchcock had long conversations about the need for a milder once-a-day version. They found the molecule that became Viread in the early 1990s amid the thousands of compounds the Czech researchers had given them. It went into human testing as just one of many anti-infection drugs Gilead was working on. The company's first AIDS drug was nixed by the Food & Drug Administration in 1999 because of side effects. But Viread was approved in October 2001, after a researcher told an FDA panel, 'We should get this into the hands of physicians right away.' Even though the drug hit the same molecular target as AZT, its advantages in convenience and safety were dramatic. It doesn't cause the same full-body malaise, for instance.

During its first year on the market Viread had decent sales of $225 million, half the company's total. The company deflected a problem when patients on the drug developed kidney problems. Gilead says it pushed FDA bureaucrats to get new warnings out quickly before a big annual meeting of AIDS specialists, so doctors would not be offended by finding out late. Gilead chief scientist Norbert Bischofberger says maintaining doctors' trust is worth a sales hit. If Merck had warned docs early on that Vioxx wasn't for everybody, Bischofberger says, 'they wouldn't have the mess they had.'

Martin wanted to take on CombiVir, Glaxo's twice-daily combination of two AIDS drugs that generated sales of $850 million a year. So he went on the search for another once-a-day drug that he could combine with Viread. He found his second medicine, Emtriva, at Triangle Pharmaceuticals, an obscure North Carolina biotech firm.

He outbid several larger rivals to buy Triangle for $462 million in 2002 [arguably the best $462M investment in the history of the pharma industry]. One analyst warned the deal put Gilead in 'a precarious cash position.' But it was worth more to Gilead than anybody else, because it allowed Gilead to create the once-a-day combo pill Truvada. By itself Viread now generates an annual $621 million, Triangle's Emtriva $30 million. But the single pill that combines them [Truvada] brings in $2.1 billion.

The next step involved a 2004 licensing deal with Bristol-Myers Squibb and Merck to create Atripla, the first time a three-drug AIDS cocktail was available in a single pill. It brings in $1.5 billion. Gilead keeps more than 60% of the sales.

The combo pill tactic is even a defense against innovation by other companies. In 2007 Merck beat Gilead and everybody else to the market with the first big new anti-HIV drug class in years, integrase inhibitors. Its drug Isentress blocks an enzyme AIDS viruses use to latch on to cells and could have sales of $1 billion next year. But Isentress is a twice-a-day pill.

So Gilead, going for convenience again, is working on a once-a-day integrase inhibitor [Elvitegravir]. The company could sell it by itself, but its real purpose will be as part of yet another new combo--dubbed the 'quad pill'--to take on Isentress. '[The quad] is a great idea,' says Carl Fichtenbaum, an HIV specialist at the University of Cincinnati, 'but we have limited data.'

Someday, though, Gilead will have to face the same problems that now bedevil its big pharma brethren. Although the company sells or shares in 11 products, including the influenza pill Tamiflu, the vast majority of its sales come from Viread and the two combo pills. Gilead is so dominant it can no longer grow by capturing business from other AIDS drugs. The patent on Viread expires in 2017, Emtriva's in 2021. More worrisome to Gilead, doctors are hoping new HIV medications like Isentress might allow them to eliminate drugs in Viread's class from the cocktail entirely, says Alan Taege, an AIDS doctor at the Cleveland Clinic.

Those trends explain why Gilead is using its $3.2 billion cash hoard to buy smaller rivals. In 2006 it bought Corus, a maker of cystic fibrosis drugs, for $365 million, and Myogen, a maker of drugs for pulmonary arterial hypertension. Corus' drug is not yet approved, and Myogen's has been a disappointment. In March Gilead inked a deal to buy CV Therapeutics, maker of Ranexa for chest pain, for $1.4 billion, getting into the heart disease market just as giants like Pfizer are getting out. The FDA recently lifted a safety warning from Ranexa's label, which could make it a big seller. 'You can't avoid something going off patent,' says Martin. 'What we aim to do is to continue to innovate so a decade from now Viread is a smaller proportion of our business.'‹