Gilead Shares Swoon as Panel Rejection Stokes Wider Fears

Investors are concerned that management failed to address FDA worries about the AIDS drug.
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Investors Tuesday lopped a quarter off

Gilead's

(GILD) - Get Report

market cap after the company's AIDS drug,

Adefovir

, was rejected by a

Food and Drug Administration

panel.

Though not a massive setback in itself, the panel's surprising rejection of the drug raises management-credibility issues, say four Wall Streeters. These people contend that Wall Street wasn't prepared for the news, a factor that may be contributing to the selloff's steepness. Gilead didn't return a call seeking comment.

The Street expected Adefovir to bring in peak annual sales of $50 million to $100 million, as compared to Gilead's revenue of around $120 million for the nine months ended Sept. 30. But Adefovir was never as exciting as Gilead's flu drug,

Tamiflu

, or some other drugs in its pipeline.

After the Antiviral Drugs Advisory Committee's decision Monday, analysts sharply reduced Gilead sales estimates and pushed back expectations of profitability.

J.P. Morgan

, for instance, thinks the company won't earn money in 2000 now, reversing earlier estimates.

Gilead shares were off 16 1/4, or 26%, at 47 midday Tuesday.

As a result of the panel's decision, investors are questioning the safety and effectiveness of the whole class of "nucleotide analogues" of which Adefovir (also called Preveon) is a member. The class is being developed to treat AIDS and hepatitis B, but has been plagued with concerns about kidney toxicity. "Simply put, the entire AIDS and hepatitis B program is in question," says one New York money manager with a long position in Gilead. Gilead has staked its claim in such antiviral programs.

"I can't remember when a legitimate company with a legitimate, but flawed, drug went to a panel and got shot in the &%&*$& head like they did," says Mike King, an analyst for

Robertson Stephens

.

Investors thought that Preveon at the high dose, 120 milligrams, was effective but not safe for the kidneys. The panel wasn't persuaded of the drug's effectiveness. That raises fears that the next drug in the class, called

PMPA

or

Tenofovir

, may not work as well as it appears now. In fact, at the most recent annual meeting of the

American Society for Microbiology

, the drug didn't prove as strong as investors had hoped. Fans thought that was an

overreaction.

Now, "it looks like PMPA could be a second-line drug in a crowded class that is likely to have toxicity," says one hedge fund manager in New York who was short the stock and is close to the company. That means the multi-hundred-million-dollar annual sales estimates for PMPA fly out the window -- or at least get assigned a much higher risk.

Investors worry that Gilead screwed up, both in its clinical trials and in its negotiations with the agency. People who attended the meeting say that a year ago the FDA asked Gilead to prove certain things, mainly that the lower dose -- 60 milligrams of Adefovir -- was effective, as compared to a control group. But "Gilead did not deliver what the FDA asked for a year ago," says the money manager who is long. "The way it was put to me was, 'The FDA went into that meeting a year ago loaded for bear. Today, they skinned the bear.'"

From Wall Street's point of view, worse still is that Gilead didn't prep investors for this. CEO and President John Martin "deflected every question on Preveon for weeks," says an analyst for a New York hedge fund manager that was short the stock.

And what that means is that management credibility is up for question, particularly that of Howard Jaffe, the head of drug development. "This may the beginning of the end for old Howard," says the hedge fund manager.

But the well-respected (at least till now) Martin is safe, the hedge fund manager thinks.

While praising his work in developing Gilead's just-approved Tamiflu as "brilliant," Robertson's King says, "Howard's got some explaining to do. Will he be axed? I don't think so. He is close to John Martin."

Maybe that means the company as a whole has some explaining to do.