Jornada de trabajo

In the years between 2009 and 2011, Gilead’s rates of profitability were considerable, ranging from 33% to 37.6% (Gilead Sciences 2012).143 For Gilead, this rate of profitability was possible due to its patent protected prices and revenues in a single therapeutic area: medicines for HIV/AIDS. This singular product focus, built on the licensing and acquisitions of TDF and

embtricitabine highlighted in the previous section, generated almost all the company’s revenue during the previous decade. Between 2008 and 2011, for example, Gilead’s revenues climbed by about $1 billion each year, from $5 to $8 billion, with their HIV/AIDS medicines making up 85% of that revenue (Gilead Sciences 2012). Even with this steady rate of growth, however, three

historically contingent and institutional factors exposed Gilead to a structural crisis: shareholder- mediated growth as a publicly traded company, patent cliffs on its existing products, and a dry pipeline of potential compounds. These three factors would each converge to shape Gilead’s business model and its position within the innovation process less as a research and development company but more as an acquisition and regulatory specialist.

First, as a publicly traded company listed on the NASDAQ stock exchange, Gilead’s value to traders and shareholders is determined not by its profits, but by the expectation of growth in profits. In other words, value in a speculative market, as discussed earlier and described by Sunder-Rajan (2012), is based on the potential for a company’s existing or new compounds to generate more in earnings over the present rate of earnings. For companies like Gilead with established flows of revenue, a company is gauged by shareholders on their capability to grow

Roy 128

with a particular magnitude and time horizon.144 Shareholders typically compare companies’ potential for growth against their competitors as well as the cost of capital (or market rate of return). This differential rate of accumulation is tied to the notion that owners of capital can allocate that capital to other vehicles for surplus generation. The typical expectation for growth (or ‘return on investment’) in the pharmaceutical sector is 8-10%, and this growth is assessed by comparing earnings reports against those from previous quarters and the prior year (Damodaran 2017; Rajan 2012).145 This quarterly and annual time horizon combined with the expected

magnitude of growth shapes the evaluations of shareholders as they make bets on given stocks. Take Gilead in 2011: the company’s share price had increased between 2006 and 2008, mirroring its growth in HIV sales. But after this growth began to plateau in 2009 and 2010, its share price slumped, reverting back to its pre-HIV growth era (see Figure 5.6). A piece in Forbes magazine at the end of 2010 summed up the sentiment on Wall Street: “As its earlier galloping growth begins to slow, investors are starting to wonder what Gilead plans to do for a second act” (Forbes 2010). The fear that Gilead would remain a single disease business, with limited prospects for growth, dictated the company’s value rather than its nearly $8 billion in revenue or high rate of profitability. This focus on share price and expected growth, in turn, was not a natural

economic outcome; rather, political-legal shifts have configured the rising power of shareholders over business strategies. This shareholder-driven expectation of growth, however, has influenced and converged with two other institutional and political-economic dynamics to pattern Gilead’s position in the innovation process: looming patent cliffs and dry pipelines.

First, Gilead’s existing products had a finite life consequent to the length of their

intellectual property protections. Though the threat was not immediate, like those faced by other companies, these expirations – dubbed ‘patent cliffs’ – still loomed over Gilead’s prospects.146 One of their key HIV compounds, TDF, was set to expire in 2017 in several key markets including

144

For small companies like Pharmasset with no approved compounds or sources of ongoing profitability, value would be assessed through the progression of its pharmaceutical assets via clinical trials and milestone events, such as initiation of a regulatory approval process. For these smaller companies, trading volume and share price can swing between periods of inertia and quietude to ones of intense volatility and high volumes of trade.

145 _{See Damodaran (2017) for cost of capital across US sectors using multiple data sets to arrive at 7.58% for}

established pharmaceutical companies and 9.25% for smaller biotechnology companies. I discuss the cost of capital further in section 4.3.1.

146

Many of Gilead’s competitors faced the problem of finite patent life even more acutely: by 2012, drugs representing more than $67 billion in sales were expected to lose patent protection and hence face competition from generic manufacturers (Andersson et al. 2010; Rajan 2012).

Roy 129

Europe, threatening their most lucrative HIV treatment regimens in a little over five years to generic competition (Rangan and Lee 2009). Furthermore, though the HIV treatment regimens were delivering steady revenue growth for Gilead (about $1 billion each year between 2008 and 2011), they could not deliver the magnitude shareholders demanded over the long-term as the HIV epidemic plateaued (Chandran et al. 2014). Only a new source of revenue could resolve the

predicament of the patent cliff and meet those growth conditions. This meant that disease areas like hepatitis C, with existing high priced therapies being used in growing patient populations, presented an important opportunity to generate growth. But generating that growth to replace off-patent medicines within a short-term time horizon was also threatened by another dynamic: dry internal pipelines.

The same shareholder imperative on near-term and continuous growth for a publicly- traded business like Gilead also inhibited the long-term investments required to translate

uncertain research into approved therapeutics and new sources of revenue. Rather than investing in long-term research, Gilead distributed capital to shareholders through out the 2000s. Though Gilead’s revenue totaled $33 billion between 2007 and 2011, the company directed $3.3 billion, or 10%, towards research and development (S&P Capital IQ 2016a). Much of this was allocated to performing late-stage clinical trials on acquired assets in heart disease, as Gilead attempted to diversify beyond HIV (United States Senate, Committee on Finance 2015:667).147 Meanwhile, the company directed $9.9 billion to shareholders in the form of buybacks, or 3x their research and development budget. 148

In hepatitis C, the company had advanced two compounds into phase II trials, but both appeared to lack the effectiveness of competing compounds like PSI-7977.149 Monitoring Gilead’s pipeline, Pharmasset’s executives noted that “their protease inhibitor is not very potent and has a resistance problem,” and observed that their other compound showed the potential for adverse

147

These acquisitions and clinical trials yielded $350 million in revenue between 2009 and 2010, as these medicines were for smaller patient populations suffering from specific heart-related problems (Gilead Sciences 2012).

148

Via the strategies of ‘maximizing shareholder value’, earnings that could not be used to generate the growth characterized earlier through investments within the firm were expected to be directed to

shareholders. I describe these distributions to shareholders – in the form of buybacks and dividends later in this chapter as well as in chapter 5. Gilead directed a bulk of the remainder towards shareholders via share repurchases (or share ‘buybacks’), the function and consequences of which we review later in the chapter. See Appendix C for key financial figures for Gilead between 2007-2016.

149 _{Interviews 26, 27, 28, 38 provided context into the array of hepatitis C compounds in 2010-2012, and their}

Roy 130

heart related events at the necessary dosages (United States Senate, Committee on Finance 2015:667). Unlike Pharmasset’s approach to pursue the riskier nucleoside science in developing sofosbuvir, Gilead’s more modest approach of building on known (and less risky) science via protease and non-nucleoside inhibitors had left its hepatitis C armamentarium empty. Evaluating Gilead’s pipeline and looming patent expirations, an analyst with Bloomberg business stated, “We continue to be pessimistic about Gilead’s long-term growth”, yet noted that he had upgraded the stock from a sell to a buy because of “a large share buy-back plan announced earlier this month” (Jannarone 2011). In this context, long-term investments were eschewed for distributions of capital to shareholders, leaving a shaky pipeline on which to meet the expectations of shareholders.

These twin pressures – patent cliffs on existing treatments as well as the dry pipeline from which to generate new revenue – shaped Gilead’s search for near-term growth. To resolve their predicament of generating growth in the context of patent cliffs and limited pipelines, Gilead saw acquisitions as their preferred approach to using their accumulated capital.150 Reflecting on their position in an earnings call, then CEO John Martin described this strategic preference to Gilead’s investors: “We typically like things where we can have impact on Phase III and where we can accelerate those products either into the approval process or into greater indications after the approval process” (Seeking Alpha 2015). In other words, Gilead’s senior leadership saw their

company as less oriented around researching and developing new compounds within their own labs, but more as an acquisition specialist delivering near-term growth at the magnitude necessary to meet the expectations of financial markets.

As I introduced in chapter 1 with my description of shareholder control and its role in financialization, Gilead’s orientation towards shareholders and financial markets is not a natural phenomenon but part of a historically and politically contingent dynamic (Davis 2009; Lazonick 2015). The shift towards shareholder control began in the 1970 and 1980s with the notion that shareholders in financial markets – and not managers of business organizations, as before – could most efficiently allocate capital across the economy to deliver growth using the metric of share price (Fama and Jensen 1983; Jensen and Meckling 1976). Any investments by a company needed to have the potential to generate growth at the magnitude and within the time horizon described

150

This approach aligned with and reinforced the seemingly cemented ‘performance narrative’ pervading the pharmaceutical industry, in which large companies increasingly were to ‘outsource’ the ‘research’ side of R&D, leaving it to more nimble early-stage companies and venture capital to perform (Andersson et al. 2010; Gleadle et al. 2014; Montalban and Sakinc 2013).

Roy 131

earlier; any capital that managers believed could not generate this growth, under this view, should be distributed to shareholders (Fama and Jensen 1983; Jensen and Meckling 1976; Jensen 1986). As I describe later in this chapter, regulatory shifts enabling this distribution of capital (through buybacks, primarily) along with linking executive compensation to share price through stock options and awards bolstered shareholder control over the capital allocation strategies of

businesses. The extractive logics underpinning shareholder control, which I elaborate further later in this chapter and in chapter 5, created a structural crisis for Gilead.

As 2011 wore on, Gilead knew that losing out on the hepatitis C market could hold

potentially dire consequences for the business. Gilead’s competitors in hepatitis C, such as Merck and Bristol-Myers Squibb, were long-standing companies with diversified businesses across multiple therapeutic areas (Jannarone 2011). Gilead’s reliance on HIV left the business in a vulnerable position, especially if one of its competitors “won” the hepatitis C sweepstakes by coming to the market first or with a best-in-class treatment regimen (Ha et al. 2011). A larger company, for example, could view Gilead’s HIV business as an attractive acquisition opportunity, and launch a merger or takeover attempt to gain control over this revenue stream (Jannarone 2011). Transcending its near-term growth crisis would thus be facilitated by a major play in

hepatitis C. In August of 2010, Gilead hired John McHutchison, a doctor who led many early-stage clinical trials in hepatitis C for different biotechnology companies - including early stage trials for Pharmasset’s PSI-7977 (Gilead Sciences 2010). He had been immersed with the details of the many potential late-stage assets for hepatitis C that were being developed beyond Gilead’s labs (Werth 2014). Pharmasset’s senior leadership noted the hire, observing “the very clear signals from Gilead and John are that they will be making some strategic moves in HCV” (United States Senate, Committee on Finance 2015:667). We now turn to the intersection of Gilead and Pharmasset’s trajectories to unpack the relations of power and dynamics of pricing at stake in financial markets for pharmaceutical assets.

Roy 132

Figure 4.3 Gilead’s share price between August 2006 and December 2010

Caption: After rising from $16 to nearly $30 on the strength of HIV sales in 2006 thru 2008, Gilead’s share value fell and stagnated between $16 and $20 in 2010, as sales growth from HIV continued but slowed, and the company did not have another product in the pipeline anticipated to generate new growth. Source: Google Finances, GLD.