Gilead Sciences (GILD is down 10% Wednesday -- the stock is now trading at a three-year low -- following last night's dismal guidance warning revenue from its hepatitis C drugs was likely to fall 40%-50% in 2017 compared to last year.
On its conference call last night, Gilead management sounded defeated. The company is shrinking, the opposite of what biotech companies are supposed to do.
Gilead CEO John Milligan had no reassuring answer to a question posed by an analyst: Is there a strategic plan in place to get Gilead growing again? Without buying something, Gilead can't grow, Milligan admitted. But so far, Gilead has been unable or unwilling to pull the trigger on a growth acquisition, even with $32 billion in cash on its books.
How did Gilead -- one of the biotech industry's great success stories -- fall to this low point?
I posed this question on Twitter Tuesday night:
Thinking more about $GILD. Perhaps the awful, brutally honest lesson here is: Curing disease is great for patients but sucks for business.— Adam Feuerstein (@adamfeuerstein) February 8, 2017
It's a provocative question because it invokes the worst conspiracy theories thrown at the pharmaceutical industry in which people accuse drug makers of stifling research into disease cures because it is more profitable to treat symptoms. Hook patients on pills forever.
For the record, I don't believe that charge. There is no cure for cancer hidden away in a vault somewhere. But the boom-and-bust of Gilead's hepatitis C franchise is also a cautionary tale for anyone who believes developing and selling a therapy that cures disease is a no-brainer business win.
Maybe, it's fairer to say curing disease can be great for business -- until it's not.
Gilead acquired Pharmasset in November 2011 when its stock was around $20 per share (split adjusted.) Even with the recent slide, Gilead shares have tripled in value. At the stock's peak in 2015, Gilead shares were up six times.
In 2013, Gilead total revenue was $11.2 billion. In 2014, the first full year for sales of the hepatitis C drugs Sovaldi and Harvoni, Gilead revenue exploded to $24.9 billion. In 2015, Gilead revenue grew again to $32 billion, of which $19 billion came from hepatitis C. That's insane growth. Gilead made billions of dollars from its hepatitis C drug franchise. Shareholders were rewarded. By all measures, curing hepatitis C was great business for Gilead.
Why did it end? Because when you cure disease, the pool of patients shrinks. Gilead admits the number of hepatitis C patients starting therapy is falling, and those patients that are available to treat today are harder to reach. There is also more competition from Merck (MRK and Abbvie (ABBV selling their own hepatitis C cures. Insurance companies are taking advantage of the competition and shrinking patient pool to drive larger discounts and rebates, which eats into revenue and profits.
In 2017, Gilead says hepatitis C drug sales will shrink to $7.5 billion to $9 billion, from $14.8 billion in 2016. And in 2018, hepatitis C sales will likely fall farther.
The hepatitis C situation is completely different from Gilead's astounding and continued success in HIV. Once universally fatal, HIV has been defanged by highly effective antiviral therapies that keeps the virus suppressed -- as long as patients take their medicine. There is no cure for HIV, but the disease is now managed by chronic, daily therapy.
Every HIV patient prescribed a Gilead pill is like an annuity to the company. The revenue stream is continuous. It doesn't end, unless a patient switches to a competing medicine, or patents expire. But even then, Gilead continues to develop new, better HIV medicines.
HIV is maybe the best biopharma business ever invented. And Gilead dominates.
Gilead has no regrets about getting into the hepatitis C business. Curing disease should always be a goal for the biopharma industry. Where Gilead fell short was failing to plan for the downside to its hepatitis C business. Maybe Gilead believed hepatitis C sales would be more sustainable than they turned out to be. Or, maybe Gilead believed, mistakenly, that its internal drug research pipeline would make up for falling hepatitis C sales. Maybe Gilead was too cautious, too conservative, when considering external acquisition candidates.
No one will ever accuse Gilead of being run by a bunch of dopes. Milligan and his team are really smart people. Therefore, the company's current predicament is a warning to the rest of the biopharma industry that as much thought needs to go into selling cures as developing them. There is an economic disincentive to curing disease if the business model doesn't work.
Are you listening, gene therapy companies?