Gilead's HCV and HIV Drugs Support Wide Moat

With AbbVie ABBV poised to launch a very competitive HCV regimen this fall and GlaxoSmithKline’s GSK two-drug HIV regimen set to produce phase 3 data by the end of the year, Gilead is not likely to see top-line growth until at least 2019, in the absence of a large-scale acquisition. We’re maintaining our wide economic moat rating, given Gilead’s dominance in HIV and HCV and strong returns on invested capital over the next several years, even in our bear-case scenario.

In HCV, campaigns to improve diagnosis in the U.S. since the fall of 2016 appear to be stabilizing demand, and similar efforts are now underway in Europe. Gilead now expects 185,000-200,000 patients to be treated for HCV in the U.S. in 2017, up from prior guidance of 150,000-175,000, but management cautioned that it still expects a decline in the second half.

Overall, sales of Gilead’s pangenotypic Epclusa regimen (12 weeks) are growing, as sales of Sovaldi (the previously favored foundation for genotype 2 and 3 patients) are shrinking, and Harvoni (still the genotype 1 standard and often used for only 8 weeks) appears to be seeing slower declines, given increased diagnosis rates.

The recent approval of Gilead’s Vosevi in the U.S. as a 12-week treatment for patients who have failed prior regimens is not likely to drive significant uptake in this geography, but Vosevi’s anticipated approval as an 8-week regimen in Europe for a broader group of patients (despite failing to show noninferiority to 12-week Epclusa) could make it more competitive with AbbVie’s new regimen there. AbbVie’s expected approval--likely in August in the U.S. and Europe--will create additional price and volume pressure, as we expect this 8-week regimen to launch at price parity to Gilead’s 8-week Harvoni regimen, which would be a significant discount to 12-week Epclusa pricing.

In HIV, recent phase 3 bictegravir data should allow Gilead to launch a new regimen in 2018, but we still model significant price pressure once Glaxo launches its two-drug regimen (2019) and once Gilead is competing against its own first-generation combination regimens (2022). We continue to expect rapid uptake of tenofovir alafenamide-based regimens (Genvoya, Descovy, and Odefsey), partly countered by declines in Europe in the second half of the year as patents expire on older products Viread, Truvada, and Atripla.

Recent details from studies comparing Gilead’s new single-tablet regimen containing integrase inhibitor bictegravir with regimens based on Glaxo’s integrase inhibitor Tivicay showed noninferiority on efficacy, although Glaxo’s NRTI foundation (ABC/3TC) contained in Triumeq appears to cause more side effects than Gilead’s TAF-based backbone. Competing two-drug regimens are likely to launch in 2018-19, as Glaxo and Johnson & Johnson JNJ have filed for a Tivicay/Edurant combination (in patients already suppressed on triple combo therapy) and should launch the regimen in 2018, and we expect data for Glaxo’s Tivicay/3TC regimen by the end of the year in treatment-naive patients. That said, we still have doubts about the long-term safety and efficacy of such a regimen.

Investors are still waiting for Gilead to make some key strategic decisions on focus areas outside HIV and HCV and a potential large-scale acquisition. We also see a few opportunities for upside to our fair value estimate, as we don’t think Gilead’s pipeline is in recent valuations. Wild cards could include positive data for GS-5745 later this year in gastric cancer, positive data for curative HIV drug candidate GS-9620, phase 2 data by early 2018 for nonalcoholic steatohepatitis programs outside of phase 3 drug selonsertib (GS-9674 and GS-0976), and phase 3 data in early 2018 for filgotinib in ulcerative colitis (where it leads other next-generation JAK inhibitors). We currently include $1.6 billion in NASH revenue in our model by 2026, with significant upside to this if trials continue to progress as planned.