As we look back at the year 2024, the pharmaceutical industry in China seems to be navigating a path riddled with obstacles and challengesAmidst the overwhelming number of pharmaceutical companies listed on both the A-share and Hong Kong stock markets—741 in total—more than 70% saw their stock prices decline significantly throughout the yearParticularly, a few biotech firms listed on the Hong Kong stock exchange, such as Shengnuo Pharmaceutical and Jianshi Technology, faced astonishing losses, with stock price drops approaching 90%.

In the midst of this storm, however, Gilead Pharmaceuticals has emerged as a standout, managing to turn its fortunes around and capture the attention of the investment communityAt the beginning of this year, Gilead's shares were priced at just 1.46 HKD; they even dipped as low as 0.76 HKDYet, in a surprising twist, the company's share price soared over the next four months, climbing to a new high of 3.22 HKD in December, reflecting an impressive increase of over 120%.

This raises the question: what was behind such a rapid increase in Gilead's stock value in an otherwise stagnant market? To understand this turnaround, we must first delve into the tumultuous past of Gilead Pharmaceuticals.

For biotech firms, the transition towards commercialization represents a critical juncture on the path to becoming a fully-fledged biopharmaceutical company

Successfully navigating this stage allows companies to begin generating stable cash flows, which in turn fuels sustained research and development while gradually establishing a comprehensive industrial presence.

Once upon a time, Gilead Pharmaceuticals was a biotech company that appeared on the brink of achieving full commercializationIt made headlines in 2018 when it became the first biotech to launch an initial public offering (IPO) in Hong Kong under the banner of "18A." By that time, the company’s flagship product, the hepatitis C drug, Gonowei (Danolisvir), had already gained market approvalGilead also boasted seven other research pipelines targeting a range of conditions, including viral hepatitis, fatty liver disease, HIV, and various cancers, with two of those products already in late-stage clinical trials.

At that juncture, Gilead seemed poised for successWith the debut of Gonowei, the drug raked in sales of 70 million HKD within just six months, and this figure skyrocketed to over 124 million HKD the following year

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The impressive sales prompted high expectations from the market, and Gilead’s market capitalization once soared to 15.69 billion HKD.

However, a turning point came in 2019, just two years after the IPODespite being the first domestically produced hepatitis C drug, Gonowei faced fierce competition in a crowded marketIn particular, Merck's Elbasvir/Grazoprevir and similar imported drugs managed to dramatically cut prices by 85%, successfully penetrating China’s insurance programsGonowei, meanwhile, struggled to secure a competitive placement due to its need to be used in conjunction with interferon, which complicated pricing negotiationsBy 2020, Gilead Pharmaceuticals made the difficult decision to terminate its interferon-combination treatment plan, and by 2021, it reported a stark sales figure of just 33,000 HKD for Gonowei.

Even as Gonowei struggled, Gilead's second innovative drug, the hepatitis C medication Velpatasvir (Lavydi), gained FDA approval in July 2020 and was included in China’s insurance plans in 2021. However, by this time, the market for hepatitis C drugs had markedly shifted.

Gilead's revolutionary hepatitis C drug, Sofosbuvir, dramatically improved cure rates from 50-80% to over 90%. Alongside subsequent products such as Harvoni and Epclusa, which boasted cure rates nearing 100%, the treatment landscape for hepatitis C was forever transformed

The number of patients cured continued to swell, leading to a shrinkage in the hepatitis C drug marketGilead, having missed the first-mover advantage, saw its revenue from hepatitis C drugs falter.

Compounding the challenges, Roche also adjusted its hepatology strategy for the Chinese market and chose to withdraw its hepatitis C drug, Pibrentasvir, from China in 2022. Gilead, which had served as the sales agent for Pibrentasvir, recorded service income of 71 million HKD from the drug in 2021, which accounted for over 90% of total revenue, thereby further depleting its hepatitis C drug market presence.

Following the loss of the hepatitis C market, Gilead launched its third product, RitonavirAs a component of the COVID-19 treatment Paxlovid, Ritonavir generated nearly 50 million HKD in revenue for the company in 2023, constituting more than 80% of total annual earningsHowever, with the end of the pandemic, demand for Ritonavir subsequently dwindled.

As the first half of 2024 unfolded, Gilead Pharmaceuticals found itself with zero revenue, its core products struggling to generate any sales, effectively landing the company in a "no drugs to sell" predicament.

Yet, despite this significant setback, Gilead’s current market capitalization of 800 million HKD is seemingly undervalued

By mid-2024, Gilead reported cash reserves amounting to 2.117 billion HKD, sufficient to support milestones in research and operations for the next five years.

For a biotech company with several promising research pipelines, five years can be a transformative periodGilead’s most pressing task is to identify a blockbuster product within its extensive development portfolio to reignite growthBefore achieving this, Gilead needed to prune less competitive and uncertain projects, directing limited resources and funding towards core product development.

In June 2023, Gilead announced the termination of its development for two candidate drugs: ASC06 for liver cancer and ASC09 for HIVASC06 was originally a core product leveraging RNA interference delivery technology, but it lost its competitive edge as advancements in technology rendered it outdatedSimilarly, ASC09, an HIV protease inhibitor, faced stiff competition from alternative treatments (like HIV fusion inhibitors) that have been approved in China and shown superior efficacy, safety, and resistance profiles.

In a further strategic shift in March 2024, Gilead confirmed it would cease clinical trials for ASC42, aimed at treating primary biliary cholangitis (PBC), also discontinuing clinical studies of ASC42 in tandem treatments for metabolic associated steatotic liver disease (MASH) and hepatitis B

Clinical results demonstrated that ASC42 lacked the competitive advantages needed against emerging PBC therapies.

After a series of bold decisions, Gilead strategically consolidated its focus onto MASH, now dedicating nearly all resources to R&D efforts in this domainThe current candidate pipelines in the MASH arena include ASC40 and ASC41.

ASC40 (Dynamisvir) is an oral selective fatty acid synthase (FASN) inhibitor that received FDA breakthrough therapy designation in October 2024 for the treatment of MASH patients with moderate to severe liver fibrosis (F2 to F3 stages). The interim results from Phase II clinical trials indicated statistically significant and clinically meaningful improvements in disease activity, resolution of MASH, and liver fibrosisGilead holds exclusive rights to ASC40 in the Greater China region and is planning to kick off Phase III trials in collaboration with Sagimet

Additionally, trials targeting moderate to severe common acne are currently underway domestically.

ASC41 is a liver-targeted small molecule administered once daily, which is touted as a potential best-in-class THR-β agonistData from mid-phase II trials revealed that 93.3% of participants experienced at least a 30% reduction in liver fat content after 12 weeks of treatment with ASC41, showcasing distinctly favorable ALT and AST results in comparison to other THR-β agonists currently in clinical or commercial stages, providing Gilead with a considerable competitive edge globally.

After cutting unpromising projects and concentrating efforts on MASH, Gilead did not reduce its R&D investments, spending 132 million HKD in the first half of 2024, marking a year-on-year increase of 43.5%. Furthermore, R&D personnel now constitute 68.9% of its workforceThis decisive strategic pivot reflects Gilead’s hope of rapidly cultivating competitive core products to restore its standing in the biopharmaceutical market.

Nonetheless, choosing to delve into the MASH arena comes with its own share of challenges, both as a necessity due to previous failures and a recognition of the immense unmet clinical needs within the sector

The company also benefits from its prior experience in the liver disease arena.

According to a report from Frost & Sullivan, the global incidence of NASH (now referred to as metabolic dysfunction-associated fatty liver disease (MASH)) surged from 310 million in 2016 to 350 million in 2020, with projections indicating the figure will reach 490 million by 2030. In China, the number of NASH patients hit 38.7 million in 2020, expected to accelerate to 55.5 million by 2030.

Despite the massive MASH market potential, the path to finding effective treatments has been fraught with setbacksFor more than four decades, attempts to develop drugs targeting MASH have largely ended in failure, leaving a vast patient population without viable treatment optionsThis landscape was altered with the FDA's approval of Resmetirom in March 2024 as the first MASH drug aimed at treating adults with hepatofibrosis, thus filling a critical gap in medication for MASH and unveiling a once-untapped multi-billion dollar market.

Resmetirom debuted with a price tag of 138.96 USD per pill, generating sales of 14 million USD and 48 million USD in the second and third quarters of 2024, respectively

With the commercial rollout of MASH drugs underway, Frost & Sullivan anticipates the global and Chinese MASH markets will reach 10.7 billion USD and 3.2 billion CNY, respectively, by 2025, and following a sustained growth trajectory to 32.2 billion USD and 35.5 billion CNY by 2030.

However, despite Gilead's early positioning within the MASH space, it must contend with the notorious reputation of the sector as a “graveyard” for R&D, where many multinational corporations have faltered in their attemptsFurthermore, many domestic firms have begun to set their sights on MASH, with over 20 clinical stage pipelines now in developmentCompetitors such as Zhengda Tianqing, Zhongsheng Pharmaceutical, Xuanzhu Biotech, Yachuang Pharma, and Tuozhen Biotech have all entered the fray, making the future uncertain as to who will emerge victorious.

Additionally, it is worth noting that Gilead is not solely focusing on MASH; it has recently announced intentions to enter the weight-loss medication market

Its pipeline includes ASC30, the first and only small-molecule GLP-1 receptor agonist that can either be injected monthly or taken daily to treat obesity, currently undergoing Phase I clinical trialsWhile Gilead's foray into GLP-1 may be relatively late, the monthly injection schedule presents a potential point of differentiation.

In summary, the drastic fluctuations in Gilead Pharmaceuticals' stock price throughout 2024 can be attributed to two main factorsKey among them is that the company’s stock was significantly undervalued, with its market cap falling below its cash reservesMoreover, the pivot towards MASH and GLP-1 pipelines holds potential promise, helping to enhance the company's competitive positioning.

Through decisive strategic transformation, Gilead Pharmaceuticals has begun to showcase positive signs of overcoming adversity, garnering some renewed confidence from the capital markets