Did China Just Crush Gilead Sciences' Dreams?

By Markets Fool.com

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Source: Gilead Sciences via Google Maps.

If you were hoping that millions of hepatitis C patients would translate into billions of dollars in sales for Gilead Sciences' hep C drug Sovaldi, then this news is going to come as a big disappointment:

Chinese regulators have rejected a key patent application for Sovaldi.

The decision by China's State Intellectual Property Office, or SIPO, could set a precedent that creates a smoother path for generic manufacturers to compete against Gilead Sciences in developing markets like China, where the majority of people with hepatitis C live, or, at a minimum, help these markets negotiate lower prices for Sovaldi. If so, then Gilead Sciences' Sovaldi sales could suffer.

What's at stake?
Depending on which source you listen to, between 150 million and 170 million people live with hepatitis C globally. That makes the hep C treatment market worth billions of dollars annually.

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Last year, Sovaldi sales eclipsed $10 billion -- an absolutely astounding number for a drug in its first year on the market. The vast majority of those sales were generated in developed markets such as the U.S. and Europe, where as many as 13 million patients live. Patients in these markets are unlikely to be affected by China's patent decision;however, if other countries follow China's lead, the decision could make it tougher for Gilead Sciences to market Sovaldi to millions of patients living in far-flung regions.

In a bid to extend the drug's reach, Gilead Sciences allowed generic-drug makers to produce authorized copies of Sovaldi and sell them at a steep discount in 91 developing markets. However, Gilead didn't include China in those agreements, leaving the door open for the company to market Sovaldi in the nation directly, likely at higher prices.

Is this a game changer?
Although developing markets aren't as profit-friendly as the United States, where Sovaldi costs $84,000 for a 12-week treatment, the sheer size of the patient population in China means sales could still be meaningful. There are over 29 million people living with hep C in China, and industry watchers have speculated that Gilead Sciences could charge $2,000 or more for a 12-week treatment course in the nation.

Regardless, I don't think investors should abandon their long-term theses for Gilead Sciences based on this news.

China is notorious for making patent decisions that don't jibe with similar patent decisions made in developed markets like the U.S., so investors might want to take this news with a grain of salt. After all, Gilead Sciences' patents remain protected in developed markets and it's those markets that will remain the key contributors to Gilead Sciences' top and bottom lines, not China.

Additionally, the patent rejected is for the inactive Sovaldi prodrug technology, rather than on Sovaldi's active chemical compound (the prodrug becomes active via the body's metabolism).

Furthermore, while the threat of generic Sovaldi in certain markets could present a growth headwind to Gilead, investors should remember that hep C is one of biopharma's fastest-growing markets. Biotech companies like Gilead Sciences are investing big money into next-generation hep C therapies that promise to work better and require fewer doses than Sovaldi, even in tough-to-treat cases.

In the third quarter, for example, Gilead Sciences is on tap to update investors with data from a trial evaluating a single-pill combination therapy of Sovaldi and GS-5816. If successful, this drug could replace Sovaldi as the go-to option for non-genotype 1 patients.

Looking ahead
Gilead Sciences bumped up its full-year sales and profit forecast following strong first-quarter results in which Harvoni and Sovaldi posted combined sales of $4.5 billion. However, Sovaldi accounted for less than $1 billion of those sales, which is down substantially from its $2.3 billion contribution to the top line the year before. The fact that Sovaldi sales are already dropping, due to the launch of better treatments such as Harvoni, suggests the Chinese agency's decision is not likely to have a great impact on the company's revenue stream over time. For that reason, among others, I continue to believe Gilead Sciences is a blue-chip biotech stock that deserves a spot in portfolios.

The article Did China Just Crush Gilead Sciences' Dreams? originally appeared on Fool.com.

Todd Campbell owns shares of Gilead Sciences. Todd owns the equity research firm E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.