Gilead: What Will Provide the Growth Needed for Multiple Expansion?

- In order to outperform, Gilead will need to generate higher revenue growth going forward

- HIV franchise sales will depend on Gilead’s ability to transition TDF-based patients onto newer TAF-based drugs after 2021. TAF-based drugs are safer, but generic TDF could look favorable to payers.

- Filgotinib is a key component of the pipeline and will have two important readouts this quarter. Expectations are high and Gilead will need to show strong safety results.

- Ultimately, Gilead has a path to growth, but the visibility is poor. Gilead must show a clearer vision to growth in order for the stock to rerate.

The key debate for Gilead is on what will drive growth that will get the stock trading like a growth stock again, and not like a mature biotech stock. There are two key issues that institutional investors are discussing that would help move the stock in the near-term: 1) the durability of the HIV franchise and the transition from Truvada to Descovy once generics enter the picture in 2021, and 2) filgotinib’s upcoming readouts in FINCH1 and FINCH3.

Gilead’s HIV Franchise Depends on Transition to Descovy from Truvada in PrEP

One of the key debates among bulls and bears is the growth of Gilead's dominant HIV franchise, which includes Atripla, Truvada/Descovy, Complera/Odefsey, Prezista, Stribild/Genvoya, and Biktarvy. These drugs generated $14 billion in 2018, representing 66% of their total sales. 

The franchise has shown strong growth over the last several years with 11% growth in 2017 and 12% growth in 2018. Gilead has extended the lifespan of the franchise by introducing incrementally safer and more convenient drugs over time. Its newest iteration of drugs are TAF-based (tenofovir alafenamide) drugs with a more tolerable profile than its prior TDF-based (tenofovir disoproxil fumarate) products..

Within its TAF-based products, investor expectations are highest for Biktarvy. Biktarvy is even more tolerable than other TAF-based drugs like Genvoya (launched in 2015), as it does not have the bone loss and mineralization defects (BMD) warning on its label. Launched in 2018, Biktarvy has outperformed expectations over the last three quarters with stronger-than-expected uptake. Analysts expect this drug to become the largest drug within the HIV portfolio by 2021 with over $5 billion in revenue, according to consensus estimates.

A key debate here is the growth profile of the HIV franchise after loss of exclusivities in TDF-based regimens starting in 2021. Generic Truvada and Atripla could enter as soon as 2021 in the US. Consequently, consensus estimates currently do not expect the HIV franchise to grow beyond that point.

In order to continue to maintain sales and minimize business disruption, Gilead must successfully transition its existing patients using Truvada for PrEP in the US (which could represent anywhere from $1.5 to $2.5 billion in revenue based on existing patients) onto its newer TAF-based drugs like Descovy. Note that Gilead recently received approval for use of Descovy in PrEP earlier this month. This was largely expected, but does set the stage for the company to get patients onto a safer drug that won’t lose patent protection until the mid 2020s.

There are several arguments in favor of a smooth transition. On the one hand, Descovy has a more tolerable profile than Truvada. The recent DISCOVER trial revealed that Descovy showed a small benefit on BMD and renal function. These benefits could lead many physicians to recommend patients switch over to Descovy from Truvada. Additionally, Gilead has seen success in transitioning TDF-based patients onto TAF-based drugs over the last several years outside of the US.

On the other hand, the numerical benefit within the two side effects were relatively minor. The BMD improvement was 1-2%, while the renal improvement was 2-4 mL. Given the high cost of PrEP drugs, and the increased focus on cost by the government, it is not clear if the government, or physicians, will reimburse/recommend the drug. Gilead has 1-2 years to make the case to them, and the sales trajectory for its HIV franchise in the early 2020s could swing largely based on these factors.

Beyond these near-term factors, Gilead has several interesting assets in the HIV pipeline. In particular, GS6207, the capsid inhibitor, is an interesting long-acting injectable that could provide growth post F/TAF genericization. However, GS6207, like the rest of the HIV pipeline, is still in its early phases and will take some time to develop further.

FINCH1 and FINCH3 for Filgotinib in RA Expected Soon

With the HIV franchise outlook uncertain, Gilead will need more growth to come from its pipeline in order for the stock to see multiple expansion. Note that the company recently had a high-profile miss in nonalcoholic steatohepatisis (NASH) with selonsertib. As I had written in my prior note last year, the street was largely lukewarm on selonsertib and many analysts had identified potential issues with the drug on severe fibrosis score (F4) patients. With that said, the miss was still a blow to the company and to analyst target prices, as they had begun to model revenues with a ~30% - 50% probability of success (POS) from selonsertib. With that failure now past them (and with many analysts now also lowering expectations for STELLAR3 examining selonsertib in F3 Nash) there is an increasingly high investor focus on upcoming readouts for filgotinib. 

Filgotinib is a janus kinase (JAK) inhibitor and is being studied on rheumatoid arthritis (RA), ulcerative colitis, Crohn's disease, and several other inflammatory diseases. The two key readouts expected some time this quarter are the FINCH1 and FINCH3 studies examining filgotinib in methotrexate-naïve patients and methotrexate-inadequate responders in RA. Recall that the JAK inhibitors act on the janus kinase family of enzymes to treat inflammatory diseases.  This relatively new class of drugs has had safety concerns for some time, as I've detailed in the past for AbbVie’s upadacitinib.

While filgotinib will potentially be the fourth JAK inhibitor to market, many investors believe it could be best-in-class for a JAK inhibitor market that is likely north of $10 billion in size. Efficacy looks to be in line with upadacitinib based on prior clinical trial (FINCH2) results. Additionally, in theory, filgotinib should be a safer drug given greater JAK1 selectivity, and in practice this looks to be the case as well. FINCH2 showed a 0% deep vein thrombosis / pulmonary embolism rate. Additionally, both doses looked tolerable vs. low doses only for upadicitinib and others.

On that note, it’s important to remember that other JAK1 drugs carry numerous warnings on their labels. Lilly's Olumiant (baricitinib) has black box warnings about serious infection risk, malignancies, and thrombosis. The label also Identifies risks with neutropenia, anemia, liver, and lipid elevations. Pfizer's Xeljanz (tofacitinib) has warnings about serious malignancies, risk of GI perforation, neutropenia, lymphopenia, anemia, and liver and lipid elevations. Many see filgotinib with the potential to have an improved label to these drugs and could avoid any warnings on thrombotic risk and cardiovascular event risks, key issues that have plagued the JAK inhibitor class.

Given the strong results in FINCH2 and the prior success and validation of JAK inhibitors in RA, analysts and investors are modeling a high POS of around 80% for both FINCH1 and FINCH3, and roughly $1 billion in risk-adjusted sales by 2024.

Where are the risks? First, there are some minor concerns that filgotinib could reduce sperm count. This was seen in several animal studies, but not observed in humans or in clinical trials. Gilead has a 12 week study in ulcerative colitis patients exploring the effect of filgotinib on sperm count and semen composition. While this is on investors’ radars, few expect this to be a significant concern. Second, expectations appear to be extremely high heading into the readouts. Investors will be looking for efficacy and safety readouts from both trials.

Gilead Needs Growth to Come from HIV and Pipeline

Ultimately, Gilead has a plan to drive growth for the HIV franchise in the 2020s, but it is not without risk. Biktarvy is expected to be a multi-billion dollar drug and will drive additional growth, but not all will be incremental as it will cannibalize some of Gilead's other HIV drugs. Additionally, the transition from TDF regimens to TAF regimens seems doable, but the extent of the transition could hinge on guidelines and payer reimbursement.

Outside of the HIV franchise, filgotinib should readout soon with FINCH1 and FINCH3 results coming this quarter. Expectations are high, but the drug could still see upside as consensus estimates appear to be conservative.

My own view is that it’s difficult to have confidence that this portfolio could provide the revenue growth post-2021 that is needed to expand the multiple on the stock. I would prefer to wait until more visibility emerges, either through HIV guidelines that are positive for TAF-based regimens, new business development (Gilead ended 2018 with $30 billion in cash), or additional pipeline developments.