Gilead A Strong Buy On New HIV Treatments

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Despite the expiration of some of its HIV patents in 2018, Gilead Sciences' (NASDAQ: GILD) new HIV treatments will enable the company to extend its HIV-based profitability for the long-term.

Gilead has done well with fixed-dose combination pills Truvada and Atripla combining multiple HIV medications into a single pill. The company has been rewarded with an impressive market share in the HIV treatment market, and is now looking for the same success in the treatment of Hepatitis C. Sofosbuvir, a novel Hepatitis C drug, recently demonstrated promising results in the first of several phase 3 trials, with 78% of patients having an undetectable viral load 12 weeks following treatment.

There are two characteristics of sofosbuvir which make it a potential blockbuster. First, if approved by the FDA, it would be the first all-oral Hepatitis C treatment. Second, it avoids the use of interferon, a component of standard Hepatitis C treatments associated with unfavorable side effects. Half the patients that take interferon typically develop flu-like symptoms, and one-third develop psychiatric complications such as depression. These challenges in the current Hepatitis C treatment regiments have led to approximately one-third of patients discontinuing treatment. As an all-oral, low side-effect medication, sofosbuvir has the potential to sharply reduce this rate of non-compliance and, in doing so, establish itself as the dominant drug in the treatment of Hepatitis C in a market estimated at over $20 billion. Sofosbuvir is currently progressing through phase 3 trials.

Drug Pipeline

Gilead has also recently introduced another HIV drug, Stribild, that is poised to become a lead drug choice in HIV treatment. A four-drug combination pill that builds on the success of Gilead's single-pill model, Stribild has been predicted to become the market leading HIV drug within the next decade. In addition, Gilead produces all of the component drugs within Stribild, and they would avoid the revenue sharing arrangements associated with their previous HIV medications.

Gilead has also ramped up its research into oncology drugs, with several drugs in its pipeline being tested as treatments for colorectal cancer, pancreatic cancer and a specific type of leukemia. In December, Gilead bought YM BioSciences (UNKNOWN: YMI.DL), a Canadian company, for $510 million in cash, mainly to get access to the Canadian company's research into treatments for a bone-marrow disorder. The Canadian company's lead drug candidate, CYT387, is an orally-administered, once-daily, selective inhibitor of the Janus kinase (JAK) family, specifically JAK1 and JAK2 and combats myelofibrosis, a bone-marrow disease that can lead to anemia and an enlarged spleen. The acquisition provides Gilead with a promising treatment at a reasonable price.

Financials

Total revenues for the third quarter of 2012 increased 14% to $2.43 billion, from $2.12 billion for the third quarter of the previous year. Net income for the third quarter was $675.5 million, or $0.85 per diluted share compared to $741.1 million or $0.95 per diluted share for the third quarter of 2011. Non-GAAP net income for the third quarter of 2012, which excludes acquisition-related, restructuring and stock-based compensation expenses, was $788.9 million, or $1.00 per diluted share compared to $795.2 million, or $1.02 per diluted share for the third quarter of 2011.

As of Sept. 30, 2012, Gilead had $2.65 billion of cash, cash equivalents and marketable securities compared to $9.96 billion as of Dec. 31, 2011. The decrease was due to the acquisition of Pharmasset in the first quarter of 2012. Gilead generated $2.49 billion of operating cash flow during the first nine months of 2012 including $745.4 million generated in the third quarter of 2012.

Analyst Ratings

Zacks reiterated its neutral rating on Gilead with a price target of $78.00. Analysts at Guggenheim reiterated a "buy" rating on Gilead with a price target of $87. On Dec. 5, analysts at Oppenheimer reiterated an "outperform" rating on Gilead. On Dec. 4, 2012, Barclays Capital reaffirmed its "overweight" rating on Gilead with a price target of $76. On Nov. 30, Gilead had its "overweight" rating affirmed by Piper Jaffray with a price target of $85. On Nov. 13, analysts at Stifel Nicolaus raised their price target on Gilead from $80 to $85 with a "buy" rating. On the same date, Lazard also raised its price target on Gilead from $89 to $100 with a "buy" rating.

Competition

Gilead's HCV candidate sofosbuvir, which was added to Gilead's pipeline through its acquisition of Pharmasset, is now in phase 3 trials. The results put Gilead in the lead in what has become a two-horse race with Abbott Laboratories (ABT) to produce the first treatment for the disease that doesn't include interferon with its negative side effects. In the case of CYT387 included in the recent YM BioSciences acquisition, potential rivals in the field are Incyte (INCY) and Novartis' (NVS) JAK inhibitor Jakafi, which the FDA approved last year to combat myelofibrosis. Cell Therapeutics (CTIC) has its own midstage program focusing on the blood disease. 

Bristol-Myers Squibb (NYSE: BMY)is testing sofosbuvir plus their NS5A inhibitor daclatasvir (formerly BMS-790052). Bristol-Myers Squibb had a clinical collaboration with Pharmasset and started this trial before Gilead's acquisition. It appears, though, that these two competing companies, notably Gilead, are not interested in conducting a phase3 study to evaluate this combination. Bristol-Myers Squibb is also evaluating multiple HCV drug candidates. The acquisition of Zymogenetics in 2010 for $885 million brought pegylated interferon lambda while the company acquired INX-189 (now called as BMS-986094) through the acquisition of Inhibitex in 2012 for $2.5 billion.

Conclusion

I have every reason to believe that Gilead is going to continue to be highly successful, and I have no hesitation in recommending this stock to investors.


jordobivona has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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