Gilead’s Hep B Trial Failure Will Inspire M&A Activity, Say Analysts

Published: May 29, 2015

Gilead’s Hep B Trial Failure Will Inspire M&A Activity, Say Analysts
May 28, 2015
By Mark Terry and Riley McDermid, Breaking News Staff

After yesterday’s announcement of disappointing results for Gilead Sciences, Inc. and GlobeImmune, Inc. ’s Phase II clinical trial of hepatitis drug GS-4774, analysts are speculating on whether Gilead will respond by buying its way into another market.

The trial of GS-4774 for hepatitis B had a primary endpoint of reducing hepatitis B surface antigen (HbsAg) by week 24. Although found to be safe and tolerated well, the study did not show reduction by week 24, although some reduction was seen at 48 weeks.

This didn’t seem to have much effect on Gilead. The company’s stock remained steady and is currently selling for $112.46 per share, not far from its high of $114.22 on Oct. 30, 2014. GlobeImmune stock, however, took a hit at the news.

Shares were selling for $8.00 before the news on May 27, and are currently selling for $4.01 per share. The company had a high of $14.79 on July 11, 2014.

Gilead is dominant in the hepatitis C market with drugs Harvoni and Sovaldi, which in the first quarter of 2015 generated a combined revenue of $4.55 billion. Gilead has been in a pricing and distribution war with Chicago-based AbbVie over hepatitis C treatments since last year. On Jan. 6, 2015 Gilead announced an exclusive rights deal with CVS Health Corp. to exclusively sell Harvoni and Sovaldi. AbbVie’s first salvo was on Dec. 22, 2014, when it signed an exclusive agreement with Express Scripts Inc., the largest pharmacy benefit manager in the U.S., for AbbVie’s hepatitis C treatment Viekira Pak.

On March 20, 2015, Gilead sent an email warning to health care providers about nine patients who developed cardiac problems related to its hepatitis C drugs. The patients, who were being treated with Sovaldi or Harvoni, were also being treated with daclatasvir, manufactured by Bristol-Myers Squibb Company , or Johnson & Johnson ’s Olysio.

Because Gilead and AbbVie, in particular, have such a hold on the hepatitis C market, analysts believe that sales will begin to slow. Indeed, last week, the Gilead’s CFO Robin Washington said the company is currently using an “operationally leveraged model” that looks at M&A that don’t interfere with Gilead’s “big picture” plans.

“We’re not necessarily interested in M&A focused on synergies [as] it causes us to spend a lot of time downsizing. So it’s not so much just a headcount,” she said. “I think it’s just really where we think we can add the most value to M&A that we might consider.”

Washington said Gilead would probably look at earlier stage buys, where its own internal strategy could “influence the development path.”

So what is a company like Gilead to do moving forward?

Hepatitis B, of course, would be a natural progression, despite yesterday’s bad news regarding GS-4774. Surprisingly, Michael Yee, an analyst with Royal Bank of Canada (RBC), views this as a golden opportunity for Gilead. In a research note yesterday, Yee said the study showed “slight evidence of a dose response and better effect over longer period of time.” Gilead also has another hepatitis B candidate, GS-9620 in mid-stage trials. Yee also speculates that Gilead may look to acquire others in the same space, citing Canada-based Tekmira and Assembly Biosciences Inc (ASMB).

Assembly Biosciences focuses on treatments for hepatitis B and C. difficile-associated diarrhea (CDAD) based on two proprietary technology platforms. One is the use of core protein allosteric modulators to target viral proteins. The other is a delivery technology that potentially allows oral administration of beneficial bacteria to treat diseases associated with pathologic intestinal microbes.

Other potential targets include Arrowhead Research Corporation and Isis Pharmaceuticals, Inc. .

Arrowhead Research’s ARC-520, utilizes siRNA to attack the HBV virus. On April 13, 2015, the company announced

Tekmira, headquartered in Vancouver, British Columbia, announced in January of this year that it had inked a merger agreement with OnCore Biopharma, of Doylestown, Pa., to create a global company focused on developing therapeutics for HBV.

Tekmira has a Phase I-ready HBV RNAi drug and OnCore has multiple HBV programs. The combined company’s lead product was expected to be TKM-HBV, an RNAi drug designed to eliminate HBV surface antigen expression.

In July 2014 Isis Pharmaceuticals received $1 million from U.K.-based GlaxoSmithKline as part of a deal to develop drugs for hepatitis B. This was on top of $11 million previous funding from GSK for HBV therapeutics. Isis and GSK have three novel antisense drugs for HBV in their pipeline.

Yee also speculated that Gilead might shift toward oncology mergers, such as its acquisition of EpiTherapeutics ApS earlier this month. Geoffrey Porges, an analyst at Bernstein, noted that Gilead has plenty of cash and a very clear need for a new source of revenue, making it likely the company will acquire a company in a different market. Porges wrote that he believes Gilead should make the buy for $45 billion, making the case in a note to investors last Tuesday that a Gilead/Vertex deal would create significant long-term value for Gilead.

Alexander Poulos, a columnist at Seeking Alpha, said he thinks the deal is a solid idea and worth chewing over.

“The VRTX/GILD combo makes quite a bit of sense from a discounted cash flow perspective…the melding of VRTX allows GILD to overcome the drop in revenue expected from the HCV franchise as patients are cured,” wrote Poulos. “The market is assigning GILD the lowest multiple in the sector due to the fear the revenue from the HCV franchise is not sustainable. The acquisition of VRTX would eliminate this fear thus paving the way for GILD multiple to expand.”

“Naturally, a new novel therapy for an unmet need such as a viable treatment for Hepatitis B (HBV) or Non-Alcoholic Steatohepatitis (NASH) would significantly add to GILD revenue generating ability,” he said. “My current price target for GILD is $117 as detailed in a previous article. Assuming VRTX newest combo is approved, it is quite reasonable to conclude the proposal makes sense.”

In Porges’s original note, titled “It's Time! Why Gilead Should Pull the Trigger on a $45bn Bid for Vertex…and Why Both Stocks Should Go Up,” argues that Gilead’s marriage to Vertex would solve lingering doubts about the company’s long-term revenue prospects. Many investors remain mystified as to what Gilead’s management has in store and Porges would like them to consider a major bolt-on buy like Vertex.

Gilead has a very strong hepatitis C franchise and a continuingly stable legacy HIV business. Yaron Werber, a biotech analyst at Citigroup, wrote in a note to investors earlier this month that the companies two blockbuster HCV drugs are raking in sales as they establish an even firmer foothold in a market they largely dominate.

“For Gilead in the second quarter of 2015, U.S HCV sales are tracking well at $3.2 billion to $3.4 billion versus Citi $3.3 billion and consensus $3.1 billion assuming flat TRx for the rest of the quarter and assuming a 25 percent to 30 percent gross to net discount for Harvoni,” said Werber. “This assumption for gross to net is higher than the 22 percent gross to net in the first quarter of 2015 based on IMS sales data, due to the expected full impact of agreements completed in Q1:15. There is potential for upside if the TRx come in higher or gross to net discounts are higher. Sovaldi has been priced higher than our expectation in Japan and there is potential for higher global sales driven by higher ex-U.S sales.”

Citi said that Harvoni is tracking at $2.7 billion to $2.9 billion versus its internal estimate of $2.9 billion and consensus $2.7 billion and “assumes no inventory stocking/destocking.” Based on IMS sales data Harvoni gross to net was 22 percent in the first quarter of 2015. Sovaldi is tracking at $449 million versus Citi’s estimate of $404 million and consensus $414 million.

Will PfizerKline Become the Next Pharma Player?
The speculation surrounding a possible bid from Pfizer Inc. for struggling GlaxoSmithKline is heating up, after one closely-watched biotech analyst said in a note last week that Pfizer buying the company would “unlock access to its balance sheet and improve its tax situation.”

Gregg Gilbert, a biotech analyst at Deutsche Bank, wrote in a note to investors “Introducing PfizerKline” that he thinks a deal would be “materially accretive” for both companies. Gilbert estimated that a bid priced at $29.86 a share, via half stock and half cash, which would push up Pfizer’s earnings per share by 10 percent to 16 percent beginning in 2016.

“We believe that the company has a sense of urgency to create value by leveraging the power of its balance sheet to do needle-moving deals,” Gilbert wrote. “Since media reports in the past have pointed to the potential for a Pfizer/GSK combination, we are revisiting that theme.”

We want to know, dear readers, if you agree? Should Glaxo continue going it alone, or might Pfizer buy it and create one of the world’s largest pharma players in history?

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