Is Gilead CEO Worth The Money?

Is Gilead CEO Worth The Money?
April 7, 2015
By Riley McDermid, BioSpace.com Breaking News Sr. Editor

Biotech darling Gilead Sciences, Inc. is once again involved in a heated public debate, this time surrounding the $192.7 million pay package it gave Chief Executive Officer John Martin in 2014, including stock and cash options—a period which saw Gilead’s stock price shoot up from just $9 to almost $100 and the debut of hepatitis C “cure” drugs Harvoni and Sovaldi.

Still, even without that pay, the share price’s gain means Martin is “still sitting on” over half a billion dollars’ worth of unexercised stock options, noted columnist Paul Hodgson over at Seeking Alpha, who wondered if Gilead’s CEO really needed such a large payday.

“The short answer to the question in the title is: shareholders seem to think so,” wrote Hodgson.

“Shareholders with a long position in Gilead do not seem overly concerned. While there has been a certain amount of stock price volatility over the last six months, the price has been in a fairly steady climb for the last 10 years, up 963 percent over the period,” he wrote.

“This doubtless matches the period the options were held before they were exercised, since the profit per share on the 1.7 million options that were exercised was approximately $81,” said Hodgson. “The climb in value does not seem to be at an end. Predictions for [earnings per share] in 2016 all show positive growth, though the company has been scaling back lately on the size of that growth.”

Still, Martin and Gilead may be feeling pressured by a new experimental hepatitis C drug being developed by Achillion Pharmaceuticals, Inc. , which has shown promising Phase II results when combined with Gilead’s own blockbuster near-cure Sovaldi. The shortened treatment duration could take a bite out of Gilead’s sales, warned market watchers this week, as the drug, ACH-3102, continues to meet important milestones.

With a standard 12-week course of Sovaldi costing $84,000, a drug that can cut that timeline in half would be a significant threat to Gilead’s bottom line.

Achillion attracted a lot of notice last fall when it said a combo of ACH-3102 and Sovaldi had functionally cured 100 percent of the patients involved in a small, 8-week trial. Then in February, it released results that showed that the combo was able to replicate that 100 percent cure rate after only six weeks of treatment—a truncated timeline that could eventually cost Gilead millions of dollars in lost revenue.

“The success of ACH-3102 suggests that it could be a better drug than ledipasvir, and that opens up the potential for ACH-3102 to be paired up with other Sovaldi alternatives,” wrote Todd Campbell, a columnist at the Motley Fool Wednesday. “Achillion Pharmaceuticals hopes that its own in-house option, ACH-3422, can prove to be just as potent as Sovaldi, and if it is, that it can achieve similar short-duration cure rates when paired up with ACH-3102.”

Sovaldi sells for approximately $1,000 per pill, while its sister medication, also from Gilead, Harvoni, sold about $2.1 billion in 2014. Similar competitor AbbVie ’s HCV medication Humira recorded $12.5 billion in sales and is now gaining on the coattails of AbbVie’s new hepatitis C treatment, Viekira Pak.

As for Martin’s pay as it relates to how the company handles pressures from competitors and a withering price war battle last year, Gilead said in its 2015 proxy statement that it stays in regular touch with its stakeholders to make sure they are satisfied with the way the company is being run.

“During 2014, we contacted our top 50 stockholders to gain valuable insights into the governance issues about which they care most,” said the company in a statement. “The stockholders with whom we spoke did not raise any specific questions or concerns with respect to our executive compensation program or any compensation-related policies or practices.”

Gilead has been facing stressors on other fronts as well. In early February it was once again pressured to drop the price of Sovaldi, this time offering a discount to German regulators to $46,625 for a 12-week course of the drug, an almost fire sale drop from its regular cost of $84,000 per course.

The GKV association of Germany's statutory medical insurers, who provide coverage for 90 percent of Germans, said February 12 that is has managed to talk Gilead into lowering the price of Sovaldi to 43,562.52 euros. Then that price tag is subject to a further 5.88 percent discount for other statutory insurers, leaving Gilead and its shareholders increasingly frustrated by the brutal pricing war surrounding its hepatitis C therapies.

The news is not entirely unexpected, Gilead has had to offer discounts in the American market as well, a fact it lamented to Citigroup analysts in mid-February, said head biotech analyst Yaron Werber in a note to investors.

Gilead believes that they had to provide higher rebates to get access to the public segments as state Medicaid programs have more restrictions than private plans. AbbVie was very aggressive on pricing and so the landscape weakened considerably faster than anticipated due to exclusivity contracts,” wrote Werber.

Gilead expects volume to ramp up but it is not clear how fast in the public system. The 46 percent gross/net adjustment assumes a certain level of use in the public system and could be lower if the volume is slower to materialize,” he said. “The prison system is expected to kick into gear in 2016. In general rebates for Sovaldi are much lower than Harvoni.”

Gilead has been continuing its charm offensive this spring, on sending Chief Operating Officer John Milligan and Vice President of Investor Relations Patrick O’Brien to lunch with analysts at Citigroup this winter, who came away upbeat about the controversial firm’s business structure and convinced it will soon be attempting more mergers and acquisitions.

“We came out bullish that Sovaldi/Harvoni's volume will increase in U.S. and Europe in 2015 driven by increased rebates to public segments. Gilead's pipeline is also advancing and Simtuzumab should have interim 48 week data in late 2015 in NASH,” wrote Werber.

Despite telling the BIO CEO and Investor Forum in February that Gilead “feels no urgency for mergers/acquisitions, but if we did, it would be thoughtful and reflective," Milligan’s time with Citi left analysts feeling the company is hungry for new deals, particularly in oncology.

“We detect that management is definitely gearing up the company to be very active on M&A in 2015 and oncology will likely be a key focus,” wrote Werber. “We do not anticipate one sizable deal that will have an imminent change but instead see a few smaller deals to bolster the pipeline for the mid-term.” Gilead’s team also remains convinced profits will stay high, just months after Gilead Sciences, Inc. (GILD) sold $10.3 billion of its new hepatitis C drug Sovaldi in 2014.

Both Sovaldi and Harvoni have treatment rates close to 90 percent, making them essentially a cure for many patients—success several companies are attempting to duplicate soon, posited analysts.

“Management is also confident of the sustainability of hepatitis C cash flow for the next decade based on the rate of patients being treated, continuing innovation, and focus on eradication of disease,” said Werber. “Hence management is very confident in its ability to do stock buybacks, provide a dividend, and do M&A. But the meeting also noted that there is little visibility as to how fast the public hepatitis C segment will grow, where treatment volumes will grow to, and where pricing will be as the market will get more competitive.”



BioSpace Temperature Poll
After last week's news that Gilead had issued a health advisory to doctors, concern is growing after nine patients taking Harvoni or Sovaldi along with another drug, amiodarone, were treated for abnormally slow heartbeats. One of the patients died of cardiac arrest. Three of the nine patients required a pacemaker. That has BioSpace asking, what next?

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