The collaboration between Gilead Sciences ( GILD) and the Tibotec unit of Johnson & Johnson ( JNJ) to develop a new single-pill HIV treatment announced Thursday should boost Gilead's reach and profits in the HIV market it already dominates.

But perhaps just as important, this latest deal protects Gilead's rear flank from generic competition looming in the not-too-distant future.

Gilead's stock price is down 12% this year in part because of persistent investors concerns that billions of dollars in revenue might be lost to cheaper copies of its mainstay HIV drugs starting in 2017.

Gilead shares were up 2.7% to $48.13 in recent trading.

Under the new partnership, Gilead will combine its HIV pill Truvada with J&J's experimental HIV drug TMC278 to create a new, once-daily, single-pill option for HIV patients.

TMC278 is currently in phase III studies and still must be approved by regulators in the U.S. and Europe, so the new combination pill (which has yet to be named) won't likely make its debut until 2011.

Gilead pioneered the single-pill HIV treatment approach when it debuted Atripla in 2006, which combines Truvada with Sustiva, a pill marketed by Bristol-Myers Squibb ( BMY). Atripla sales totaled $1.6 billion in 2008, or about 30% of the company's total product sales.

The new Gilead-J&J pill has the potential to be superior to Atripla because TMC278 data to date suggests the drug has a better safety and tolerability profile than Sustiva, which it will replace.

"One-third of all HIV patients in the U.S. are treated with Atripla, which set a new bar for HIV care. Our number-one priority was to provide patients with another single-tablet option," said Gilead's vice president of commercial operations Kevin Young.

"We chose Tibotec's TMC278 because the drug's data suggests that we could improve the safety and tolerability of Sustiva, which is one of the main reasons why people come off of Atripla," he added.

Gilead also stands to make more money with the new pill. Under terms of the arrangement, Gilead will pay J&J about $100 million in development costs, but in exchange, Gilead gets to purchase supplies of TMC278 at up to a 30% margin. By comparison, Gilead has a 0% margin on the Sustiva portion of Atripla.

The deal terms favor Gilead, but J&J also benefits because TMC278 will be able to piggyback on Truvada to become a leading first-line HIV drug -- something it could not do on its own.

Gilead was also somewhat vulnerable with Atripla because of looming patent expirations. Sustiva goes generic in 2010, which might actually benefit Gilead financially in the short run. But Viread and Emtriva, the two individual drug components of Truvada, have patents that expire in 2017-2018.

At that point, generic drugmakers, including Teva Pharmaceuticals ( TEVA), are likely to develop their own single-pill HIV treatments, putting Gilead's chief growth engine at some risk for a significant slowdown.

However, the new Gilead-J&J pill, when launched, will help blunt any generic threat if Gilead can switch current Atripla patients to the new (and potentially superior) pill.

Gilead is also still developing the "quad pill" which combines Truvada with two experimental Gilead drugs. This will gives the company a third single-pill treatment option for HIV patients.

"In the future we would expect the Truvada portion of the franchise to be replaced by the quad pill, with significant value upside, and the Atripla portion to be replaced by this new combination," wrote Sanford Bernstein analyst Geoff Porges in a note to clients Thursday night.

He added that the new J&J collaboration "appears to offer Gilead some measure of the 'back end economics' they need to hedge the potential catastrophic revenue loss from expiry of the tenofovir Viread patent in 2017." Porges rates Gilead outperform with a $59 price target.
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