Is the Feds' Probe of HIV Drugmaker Gilead Really No Big Deal, as Wall Street Says?

Wall Street analysts are saying that the Department of Justice subpoena recently served on HIV drug maker Gilead (GILD) is probably no big deal, but can they be sure? No one outside of Gilead's corner offices knows what the feds want, but the circumstantial evidence suggests that the potential liability could be a very big deal indeed.

Here's what is publicly known about the feds' interest in Gilead right now. The subpoena asks for information related to:

... the manufacture, and related quality and distribution practices, of AtriplaÂ®, EmtrivaÂ®, HepseraÂ®, LetairisÂ®, TruvadaÂ®, VireadÂ® and our investigational fixed-dose combination of Truvada and Edurant.

That's a lot of drugs. They represent more than 90 percent of Gilead's revenues, according to ISI Group biotech analyst Mark Schoenebaum. Nonetheless, he played down its impact, saying "the worst-case outcome is likely a fine." Oppenheimer analyst Bret Holley said something similar -- the DOJ conducts a lot of investigations that go nowhere.

The difference is that this is a criminal probe, not just a civil probe, which makes it one notch more serious than mere litigation.

As recently as Sept. 21 last year, Gilead was in the FDA's bad books. The agency inspected its facility at San Dimas, Calif., and found violations related to asceptic processing, the design of the factory, airflow, batch failures and dirty equipment. The FDA reminded Gilead it was not the first time, and hinted that more serious events might follow:

Please note that repeat observations and discussions with our office indicate that your quality unit is not adequately exercising its responsibilities, and may not have appropriate authority to carry out its responsibilities.

You should take prompt action to correct the violations cited in this letter. Failure to promptly correct these violations may result in legal action without further notice including, without limitation, seizure and injunction.

Gilead has received warning letters before.

Three facilities, one subpoena
Analyst Schoenebaum said that Gilead told him the probe is not related to its San Dimas facility. That's curious, because the probe is related to "manufacture, and related quality and distribution," and San Dimas is responsible for manufacturing of some drugs and the distribution of Gilead's antiretroviral products, according to the company's own web site. According to this Gilead business presentation, San Dimas is at the heart of the type of operations described in its announcement of the subpoena:

Gilead operates a > 200,000 sq. ft. manufacturing campus in San Dimas, California dedicated to the production of injectable drug products, including AmBisomeÂ® (liposomal amphotericin B injection). The San Dimas campus is the North American commercial manufacturing, testing, and distribution center for Gilead.

The subpoena came from the North California U.S. Attorney's office. Gilead's only other California operations are its North American HQ, which houses its antiviral research facilities, and its Palo Alto site, which houses its cardiovascular facility. Letairis is a CV drug, and most of the rest of Gilead's revenues come from antivirus products. If the San Dimas site were not included in the subpoena it would not necessarily make things any better.

It is true that many subpoenas simply go away on their own. But in recent years the FDA has been under pressure in Congress and from the Obama Administration to be be seen doing something against subpar manufacturers:

Ranbaxy is banned from importing drugs into the U.S because of unresolved FDA warnings about its factories.
Genzyme was hobbled by an FDA consent order about an infection at its Allston, Mass., site.
GlaxoSmithKline paid a $750 million fine and was forced to close its Paxil factory in Cidra, Puerto Rico, after failing FDA inspections.
Likewise Johnson & Johnson is rebuilding its Fort Washington Tylenol facility from scratch after FDA-ordered inspections and recalls found it to be inadequate. It has cost J&J $1.4 billion in lost revenues.

Gilead is a much smaller company than either GSK or J&J. It cannot afford to have one of its facilities disabled. The subpoena is clearly wide ranging. Gilead has a history of not getting its compliance act together with the FDA. The federal action is more serious than civil litigation level. You figure out what the message is here.

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Gavel image via Flickr user Thomas Roche, CC 2.0.

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