Gilead Sciences (GILD -1.64%) has had a massively successful run with its hepatitis C cures Sovaldi and Harvoni, and the more I look at the market size and their treatment strategy, the more I become convinced this company has plenty of room to run with hep C. Even though Gilead is treating a massive number of patients -- 600,000 total to date -- and making a massive amount of money -- $26.8 billion in two years -- it's only scratched the surface of the overall hepatitis C market, which is estimated to comprise 185 million people. And although the vast majority of those people live in places where treatment will be more difficult and also less profitable (like South America, Asia, and Africa -- Sovaldi sells for $900 in Egypt, for example, and $84,000 in the U.S.), there's still plenty of room to run in developed, profit-friendly markets.
Let's look at an example.
Europe for the long haul
Europe looks like a nice long-term opportunity for Gilead. Vice President Paul Carter noted on the most recent earnings call that, "Looking ahead in Europe, we anticipate that our HCV revenues will be constrained by country-specific budgets rather than the number of patients in need of treatment" (this and other quotes courtesy of S&P Capital IQ).
Put another way, countries will allocate some money each year to hepatitis C, and the remainder of potential patients will have to wait for future years. This means Gilead should be able to count on consistent revenue from Europe for years to come -- and indeed, Carter noted that Germany is already stabilizing, with Gilead "seeing a lower but more predictable and consistent level of patient starts."
Since the start of 2015, 80,000 Europeans have started on a Gilead hepatitis C drug, generating nearly $3 billion in revenue for the company. Add that 80,000 to the roughly 30,000 hep-C patient starts Gilead reported for Europe in 2014, and you see that Gilead has treated 112,000 people in Europe -- out of an estimated 9.3 million Europeans with the disease according to Gilead's estimates.
And with Austria and Sweden recently expanding approved use for Gilead drugs and Poland and the Netherlands opening access for the first time during last quarter, Gilead still has growth opportunities as well. Bottom line, Europe looks like a nice long-term market for Gilead, and with only 1.3% of the estimated infected population treated with Sovaldi/Harvoni thus far, it should deliver solid returns for a long time yet.
And it gets better
The U.S. has roughly 4 million hepatitis C patients -- and Gilead has treated less than 10% of them so far (333,000). Gilead has only just begun selling Sovaldi (approved in May) and Harvoni (approved in September) in Japan, which has a patient population of about 1.1 million -- and last quarter earned $454 million from that market. And even though the rest of the world isn't as profit-friendly for Gilead, it's still brought in about $900 million since inception, with 156,000 people treated so far. Basically, Gilead has a big patient population it can pursue for years to come around the world -- and that's great news both for health advocates and for shareholders.
A potential fly in the ointment?
Of course, the key to this thesis is the belief that Gilead's drugs are and will remain best-in-class, and will able to continue vacuuming up a massive percentage of the market (currently, Gilead has roughly 90% market share in the United States). AbbVie's (ABBV -0.57%) Viekira Pak has tanked so far, bringing in $467 million last quarter (compared to about $4.8 billion for Harvoni and Sovaldi). That's in large part because Viekira Pak requires 4-6 pills per day (depending on use of ribavirin with AbbVie's drug) compared to Sovaldi/Harvoni's one pill, although the FDA's recent warning about Viekira Pak probably doesn't help matters any.
But there's more to come, and Gilead will undoubtedly eventually start bleeding market share. AbbVie anticipates that it will begin selling a new hepatitis C combo in 2017, which will be a once-daily pill that doesn't require ribavirin. Merck's (MRK -1.16%) grazoprevir/elbasvir, which posted strong results in a series of phase 3 trials earlier last year (90%-plus cure rates) is scheduled for an FDA decision next January. Interesting, Merck management has signaled that they don't plan to compete on price with Gilead -- indicating that they may intend to price similarly to Harvoni (which runs a list price over $90,000). Merck also has a next-generation combination in trials, so there's something to watch longer term.
Of course, Gilead also has a next-generation combination in trials that should help shorten treatment duration to eight weeks (currently it's 12 weeks for most patients). Phase 2 data presented at the AASLD Liver Meeting in San Francisco earlier this week showed this new combination to be very effective at curing difficult-to-treat populations in eight weeks, although the data set is small and will be confirmed with larger phase 3 trials. And at the end of the day, since Merck has implied that they don't plan to compete on price -- and since AbbVie's Viekira Pak appears to be the worse drug -- I don't see any reason for cash-conscious payers like the European countries to push their citizens toward a competitor, thereby preserving Gilead's first-mover advantage across the pond.
Competition's going to increase, but Gilead is ready for it.
Here's the real kicker
Even if I'm wrong -- even if Gilead gets hosed on market share at some point by somebody -- this is a big patient population with a need for the functional cures these companies are providing. This isn't a zero-sum game: This massive market can probably support more than one winner. With that in mind, I think the safe money's still on Gilead.
