HCV Cell © Mehau Kulyk/Science Photo Library/Corbis
Hepatitis C Virus (HCV)
There has been much discussion and news lately about a new breakthrough in therapy for people with hepatitis C (HCV). This is a relatively recent development and its ramifications represent a major breakthrough for human health as well as a significant investment opportunity.
First identified in the early 1980s, HCV is a small (55 – 65 nm) single-stranded RNA virus that causes inflammation of the liver in humans. It is contracted through blood exchange from blood transfusions, needle sharing (IV drug use), and tattoos and is considered the most serious of hepatitis viruses. The virus primarily uses hepatocytes (liver cells) for replication. HCV causes cirrhosis (scarring) and if left untreated, hepatic carcinoma and eventual death. It has also been established that it uses elements of the central nervous system for replication as well. Neurological manifestations of untreated HCV involve autoimmune disorders such as Sjogren’s syndrome, cryoglobulinemia, general neuropathies and cognitive impairment, to name just a few.
Vodia Mandate
As the world population continues to grow and pressure on global resources, public health and economic stability mounts we look for investment opportunities that address our biggest challenges and span multiple disciplines. Part of our mandate is to seek value that is created from companies that build sustainable business models in health, technology, timber, housing, food and water to solve some of our most pressing problems. The development of antiviral therapies for treatment of hepatitis C is of particular interest because of its vast potential for improving human health – and consequently, its commensurately large market potential. In addition, some of our brightest scientists and best companies are investing large amounts of human, intellectual, and monetary capital towards combating viruses. Companies like Johnson & Johnson, Merck, AbbVie and Bristol-Meyers Squibb are dedicated to creating cures and are making progress in the development of antiviral medications for hepatitis.
HCV: U.S. and Worldwide
- Estimated number of people in the US with chronic HCV: 2.7 to 3.9 million [1]
- Estimated number of people worldwide to have chronic HCV: 170 to 200 million [2]
(These estimates exclude the homeless and the prison population. It is estimated that 1 in 3 incarcerated individuals in the US are HCV positive.)[3]
- Estimated number of recorded deaths each year from HCV-related liver disease: 350,000 – 500,000 [4]
- Tattoos are now a leading cause in the spread of HCV. [5]
(These estimates are likely to be very low because people with chronic HCV can live for decades without any symptoms and therefore never know they have it.)
*Actual acute cases estimated to be 13.4 times the number of reported cases in any year. [6]
Gilead Sciences
Until very recently, people with hepatitis C were faced with the prospect of living with and managing the disease because there was a low probability of a cure and the treatments that were available caused serious medical problems. There were very few – if any – good options. This is no longer the case since Gilead Sciences has come to market with a cure.
Gilead Sciences (GILD) is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. GILD has an impressive portfolio of antiviral therapies that address HIV/AIDS, liver diseases, respiratory and cardiovascular conditions, cancer and inflammation. They have achieved a number of “firsts”: most notably, they were first to market with a complete treatment regimen for HIV infection available in a once-daily single pill. The bulk of GILD’s revenues come from its market-leading HIV franchise of therapies, Atripula and Truvada. Gilead has now expanded to antiviral therapies for hepatitis and achieved another first on December 6, 2014 when they received FDA approval for their new HCV antiviral, Sofosbuvir. Sofosbuvir is a polymerase inhibitor. In simple terms, the drug finds the protein (NS5b) that is responsible for viral RNA replication and blocks it. The result is the termination of the replication process, which leads to cure. The brand name of the drug is Sovaldi and the administration of therapy lasts from 12 to 24 weeks. Taken in combination with Ribavirin, Solvaldi has demonstrated a >90% cure rate in HCV genotypes 1, 2 and 3. [7] Solvadi may be the most successful and fastest drug launch on record.
The launch of Sovaldi propelled Gilead’s earnings to one billion dollars over analysts’ estimates in the first quarter of 2014. The following chart shows the increase in all antiviral sales from Q1 2013 to Q1 2014.
Price Wars and Protest
Sovaldi’s price tag for 12 weeks of therapy is $84,000. Despite protests from pharmacy benefit managers, such as Express Scripts, insurance companies are approving and paying for it. Express Scripts threatened to start a price war between Gilead and upcoming competitors such as AbbVie, J&J and Merck. Gilead’s competitors, who have also made substantial investments into HCV antiviral therapies, have suggested that they are not interested in a price war. Even the US Senate has joined the discussion and held hearings in March 2014 asking Gilead to explain Solvaldi pricing. The cost of any treatment regimen, however, must be evaluated in the context of probable outcomes and the costs associated with them. While the price may seem high, Sovaldi was priced so that the total cost of treatment is comparable to the prior regimen protocols. Prior treatment protocols were to engage in a 48 – 52 week regimen of a combination therapy of Peginterferon and Ribavirin. The side effects of this therapy are so severe that patients often delay starting treatment or are forced to terminate prematurely. Additionally, the efficacy across HCV genotypes (GT) 1, 2 and 3 of the Peginterferon/Ribavirin treatment is mixed and falls short of the Gilead regimens by wide margins.
Peginterferon/Ribavirin Sovaldi/Ribavirin
GT 1: 31%-54% sustained viral response (SVR) >90% cure rate in HCV genotypes 1, 2 and 3 [10]
GT 2-3: 64-80% SVR [9]
Failure of treatment leads to other very costly medical problems such as cirrhosis, cancer and liver transplantation. When evaluated in this context, Sovaldi is less expensive than prior regimens.
Valuation
Gilead offers guidance for 2014 sales of all of its products at a range of $11.3 to $11.5 billion. Importantly, Sovaldi sales are not included in Gilead’s 2014 guidance. Meeting these estimates (excluding Sovaldi sales) would bring Gilead’s price-to-earnings (P/E) ratio from 29.5 down to 13. Considering the industry P/E average of 69, this suggests the company is undervalued relative to its peers. Sovaldi sales were $2.3 billion in the first quarter of 2014 and the consensus view is that Gilead’s HCV therapy sales could reach $12 billion in 2015[11]. Even if the consensus is wrong, three million Americans have Hepatitiis C. It would cost $250 billion to provide treatment to them all. Add in the WHO’s estimate of 170 million with HCV, and it’s clear the market is extremely large.
Risks
Increasing competition from Bristol-Meyers Squibb, J&J, AbbVie, and Merck (by acquisition) along with pricing pressure from payors such as governments in Europe and pharmacy benefits managers in the U.S. are risks for Gilead. Austerity measures in Europe as well as increasing health care costs in the US will continue to exert downward pressure on pricing.
We believe Gilead’s leverage lies in the unprecedented safety and efficacy of Sovaldi and that they are significantly ahead of their competition in terms of timing. We also believe that since there is no longer a reason to delay or avoid treatment the market is very likely to reveal itself to be much larger than currently understood (consider the prevalence of tattoos). This would likely absorb any future reduction in price if Gilead were forced to negotiate. In addition, Medicare recently decided to cover screening costs for hepatitis C. This will facilitate Medicare payment for hepatitis C treatment. [12] Finally, the diversification and strength of Gilead’s total antiviral portfolio forms a solid foundation for potential growth.
What’s Next?
The next advancement of Gilead’s HCV treatment is finishing phase three clinical trials. This is a single-dose combination therapy of Ledipasvir and Sofosbuvir. While Sofosbuvir blocks NS5B, the non-structural protein essential for replication, Ledipasvir blocks NS5A, a protein that plays a more complex role in the life cycle of a HCV viral cell but is also important to the replication process. The combination of Sofosbuvir and Ledipsavir could represent the final eradication of HCV across all genotypes.
Lead by CEO John Martin, PhD and COO John Milligan, PhD the management team has demonstrated exemplary stewardship of the company. Gilead’s concentration on infectious diseases, relatively low overhead, continued development of next generation therapies and strong intellectual property portfolio have helped Gilead establish the dominant position in the marketplace.
Disclosure: Vodia Capital has established a long position in GILD for some clients.
© Dwight Davenport 2014
Dwight Davenport may be contacted at ddavenport@vodiacapital.com
Endnotes
[1] Center for Disease Control and Prevention (CDC). Viral Hepatitis statistics and surveillance, accessed May, 2014 at http://www.cdc.gov/HEPATITIS/Statistics/index.htm
[2] World Health Organization (WHO), Hepatitis C fact sheet, accessed May, 2014 at http://www.who.int/mediacentre/factsheets/fs164/en/
[3] – CDC publication # 21-1306, HepCIncarcerationFactSheet-BW.pdf
[4] Personal interviews of gastroenterologists and hematologists
[5] World Health Organization (WHO), Hepatitis C fact sheet, accessed May, 2014 at http://www.who.int/mediacentre/factsheets/fs164/en/
[6] CDC, http://www.cdc.gov/hepatitis/Statistics/index.htm accessed May, 2014
[7] US Government, www.Clinicaltrials.gov accessed June, 2014. See also Gilead Sciences, Sovaldi prescription information fact sheet http://www.gilead.com/~/media/Files/pdfs/medicines/liver-disease/sovaldi/sovaldi_pi.pdf
[8] Gilead Sciences, http://investors.gilead.com/phoenix.zhtml?c=69964&p=irol-newsArticle&ID=1920785&highlight, accessed June, 2014
[9] The Alfred 2002. www.hivhepsti.info accessed June, 2014, fact sheet Ribavirin/Pegylated Interferon Combination Therapy for People with HCV
[10] US Government, www.Clinicaltrials.gov accessed June, 2014. See also Gilead Sciences, Sovaldi prescription information fact sheet http://www.gilead.com/~/media/Files/pdfs/medicines/liver-disease/sovaldi/sovaldi_pi.pdf
[11] Morniingstar.com, accessed June, 2014
[12] Centers for Medicare and Medicaid services, http://www.cms.gov/medicare-coverage-database/details/nca-decision-memo.aspx?NCAId=272, accessed June, 2014
Efficacy of treatment using Sovaldi (sofosbuvir)
Response Rates in Study POSITRON*
GT 1: > 90% SVR
GT 2 & 3: 61 – 93% SVR
(www.Clinicaltrials.gov – See also Fact sheet on Solvadi, www.gilead.com)
*POSITRON was a randomized, double-blinded, placebo-controlled trial that evaluated 12 weeks of treatment with SOVALDI and ribavirin (N=207) compared to placebo (N=71) in subjects who are interferon intolerant, ineligible or unwilling. Subjects were randomized in 3:1 ratio and stratified by cirrhosis (presence vs. absence). Treated subjects (N=278) had a median age of 54 years (range: 21 to 75); 54% of the subjects were male; 91% were White, 5% were Black; 11% were Hispanic or Latino; mean body mass index was 28 kg/m2(range: 18 to 53 kg/m2); 70% had baseline HCV RNA levels greater than 6 log10 IU per mL; 16% had cirrhosis; 49% had HCV genotype 3. The proportions of subjects who were interferon intolerant, ineligible, or unwilling were 9%, 44%, and 47%, respectively. Most subjects had no prior HCV treatment (81%). Table 12 presents the response rates for the treatment groups of SOVALDI + Ribavirin and placebo.
