Gilead's Next Logical Acquisition, Part 1: NASH And Galmed

At the Morgan Stanley Global Healthcare Brokers Conference held recently, Gilead Sciences (NASDAQ:GILD) said that it wants to acquire assets that will be complementary to its internal programs. So that got me thinking: What canGilead acquire?

In HIV, there's nothing to acquire to develop internally, because Gilead's TAF-based drugs are doing that for it, specifically with the recent CHMP nod for Genvoya and Gilead's four expensive Priority Review vouchers for each of its four TAF drugs. With these developments, Gilead can withstand Triumeq's onslaught (Triumeq, which came last year, captured 15% of the HIV market in a year, mostly by capturing Gilead's share). Moreover, HIV is a close-knit disease, and there's no scope for lateral development in the space.

In oncology, Gilead is very underdeveloped, with only idelalisib approved and a couple of others in the pipeline. Oncology is a vast space, and somehow I don't see that suddenly becoming a major theme for the company. I can make a similar argument for cardiovascular diseases.

That leaves us with liver diseases, where, in hep C, Gilead has extreme dominance. However, liver diseases are a large set of related diseases, and lateral movement of lab facilities and human resource should come naturally.

Also, if you look at Gilead's revenue by segment for the June quarter, 65% is from liver disease, 30% is from HIV, and the remaining 5% makes up cardiovascular, oncology and other diseases.

For these reasons, I believe the company's next acquisitions will come in the liver space.

Within the liver space, Gilead's revenue is primarily coming from hep C. Its drugs Sovaldi and Harvoni have been tremendous successes. However, hep C volume growth has slowed slightly in the third quarter, based on prescription data for the U.S. from Symphony and Bloomberg. While the slowdown at this stage is not significant, the hep C market will peak by the end of this decade. It is therefore important for Gilead to diversify its revenue in the liver space.

Now, in liver, I identify two sub-spaces - hep B and NASH, also known as Non-Alcoholic SteatoHepatitis, (and related indications). It seems to me that with $10 billion recently raised through a debt offering, Gilead can try and acquire multiple assets in both these spaces. Hep B is a huge space, and so is NASH. In hep B, the drug in the most advanced clinical stage is Arc-520, from a small company called Arrowhead Research (NASDAQ:ARWR). (I will discuss this in part 2 of this series.)

In NASH, which, according to some analysts, is a $40 billion market, Intercept (NASDAQ:ICPT) is top dog by clinical development stage, followed by Genfit (OTCPK:GNFTF) and Galmed (NASDAQ:GLMD). However, Intercept's obeticholic acid, or OCA, while effective in both NAFLD and NASH, increases LDL-C, while both OCA and Genfit's GFT505 are narrower in scope and do not work in pre-fibrotic stages. GFT505 also failed to meet its primary endpoint, although Genfit did the usual post-hoc subset analysis and managed to show efficacy in that subset. But the fact remains that it did not do well in the phase IIb trial. Therefore, I am left with Galmed, whose drug, Aramchol, is a prime acquisition candidate. Aramchol is the first synthetic "fatty-acid, bile-acid conjugate" (FABAC). The drug has shown itself to be effective in clinical trials, it has very high degrees of safety, and its scope is much broader, making it useful not only for NASH and NAFLD, but also in pre-fibrotic, early stages of the disease, where the patient population is larger. That upstream positioning of Aramchol is a key deal-maker, in my opinion.

Note: In a previous article, I discussed ICPT; however, I have reconsidered, based on more research. I thought then that the $10 billion amount was large enough that Gilead may be considering something as big as Intercept, which is worth about $6 billion. However, given that Gilead already has an FXR agonist from Phenex, and other issues with ICPT I have discussed here, I think ICPT isn't a viable target for Gilead.

Hepatitis C versus NASH

3 million people have hep C in the US, while 30 million people have NASH/NAFLD, 6.5 million of whom have liver cirrhosis. Hepatitis C is a viral disease which has approved cures for years. There are multiple companies working in the space with approved drugs, and although it has no vaccine, it is in many ways a dwindling disease.

Not so NASH, whose principal characteristic is fat in the liver. It is a lifestyle disease, and as people live more sedentary lives in developed countries, it is reaching epidemic proportions in these countries.

Moreover, from Gilead's perspective, there are multiple competitive cures for hep C, which is a $20 billion market. NASH, on the other hand, has no approved cure. According to some analysts, it can become a $40 billion market in its own right. So, if Gilead wants to overcome its dwindling market problem, it could target an expanding market like that of NASH.

Galmed's selling points

The NASH market is highly competitive, with dozens of players involved. However, most of them target the early and post-fibrotic stages of the disease, where patient population is lower. However, Galmed's drug, Aramchol, targets pre-fibrotic NASH as well, which affects millions of people. Nobody else in the competitive landscape does that, and this immediately makes for a key differentiator for Galmed. The goal of Aramchol is liver fat reduction, along with reduction of ballooning and fibrosis, which makes it unique. Therefore, it is entirely possible for the drug to become a monotherapy in pre-fibrotic NASH. In advanced forms of the disease, it may either become a monotherapy or a combo therapy with another anti-fibrotic agent. When considering Galmed, Gilead should be looking at this broad application of Aramchol.

Also an important differentiator is the drug's excellent safety profile. A safe drug is easily prescribed. One major consideration for liver disease treatment is an expensive and painful liver biopsy. Non-biopsy diagnosis of NASH is never confirmatory. However, because of its safety profile, Aramchol can be prescribed even to non-biopsied patients whose diagnosis is not absolutely certain. It is also true that since even high doses of Aramchol have little toxic effect, it can be prescribed in advanced stages of the disease. Another important aspect is the good data on metabolic parameters. That is important in light of the higher likelihood of a NASH patient ailing from CV disease rather than from liver disease.

Aramchol has a fast-track designation from the FDA, which gives it special privileges in regulatory dealing. Gilead already has a NASH drug in development, as does another giant Novo Nordisk (NYSE:NVO). Aramchol should be a nice acquisition for one of the major players already interested in the NASH market.

Aramchol versus the competition

NASH occurs due to the deposition of fat in the liver cells. Liver cells perform many special functions in the body, and although they have the special ability to function even with diminished capacity, and can even regenerate, fat deposit doesn't let the liver function properly. Eventually, the fat leads to fibrosis and cirrhosis, and may even cause liver cancer.

The critical thing to understand here is that the target of the best-in-class NASH drug must necessarily be liver fat reduction, which is at the root of the entire disease. If you compare the ARREST trial of Galmed with Intercept's FLINT and Genfit's GOLDEN trial, you will see that Aramchol's primary endpoint is statistically significant reduction in liver fat, while the others have much more modest endpoints related to non-worsening of fibrosis.

Also, Aramchol demonstrated a much better safety profile in its trials. It does not significantly increase bad cholesterol or LDL-C, unlike Intercept's drug, which does. It also has the mildest AEs compared to all other drugs in advanced trial.

Acquisitions in the NASH space

In the last one year, there have been 6 acquisitions/deals of NASH products/companies by Big Pharma. Lumena was acquired by Shire Plc (NASDAQ:SHPG) for $260mn upfront for its LUM002 ASBT inhibitor NASH drug candidate that was in phase 1. Bristol-Myers Squibb (NYSE:BMY) licensed TD-139, a Galectin-3 inhibitor, from Galecto for $444mn. This drug candidate was also in phase 1. Merck (NYSE:MRK) licensed NGM282, a preclinical stage CYP7A1 inhibitor, from NGM for $450mn. In April this year, AstraZeneca picked up the license for RG-125, a preclinical NASH drug candidate, for $500mn. Boehringer Ingelheim acquired NASH assets from Pharmaxis (OTCPK:PXSLY), also in preclinical stage, for $31mn upfront and total consideration of $840mn.

Most importantly, Gilead acquired assets of Phenex, specifically Px-102, an FXR agonist which is in phase 2, for $470mn. There was speculation that the company would acquire Intercept, whose OCA is also an FXR agonist. However, Phenex's candidate is non-steroidal, which will probably give it a distinct advantage over OCA. But what is PX-102's synergy with Aramchol? There is no direct advantage in combining an FXR with Aramchol (partial inhibition of SCD1), as both address metabolic features of NASH. However, there could be benefit in combining a metabolic-styled NASH therapeutic (SCD1 is a different metabolic pathway than FXR, so therefore the two are differentiated) with Gilead's Simtuzumab or any other anti-fibrotic agent, as it is becoming more recognized that treating NASH with an anti-fibrotic alone will not be sufficient in the presence of continued liver injury.

What is important, however, is that Gilead has shown an interest - worth $470mn - in NASH. I am expecting the company to consolidate its acquisitions by looking at acquiring another one or two drugs in advanced stages. Given Aramchol's profile, I wouldn't be surprised if Gilead was looking at Galmed.