A Pharmaceutical Growth Story You Can't Afford To Miss

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

Gilead Sciences (NASDAQ: GILD) is the world’s largest maker of HIV drugs, but has taken on a number of new initiatives to enter other areas of treatment. Gilead's stock rose almost 80% in 2012, the best increase in 17 years, primarily on the prospects of  its experimental hepatitis C drug, acquired in its $10.8 billion acquisition of Pharmasset. Gilead’s string of deals clearly indicates that the company's strategy includes blood cancer treatments in addition to hepatitis C. The market for treatment of leukemia and other blood cancers is one of the fastest growing markets in the cancer space.  In this article, I will examine Gilead's fourth quarter financials, which have just been announced, and look at the market growth prospects for hepatitis C and blood cancer treatments.

Fourth Quarter Highlights

Gilead recently announced results for the fourth quarter and full year 2012. Total revenues for the fourth quarter of 2012 grew by 18% to $2.59 billion, from $2.20 billion for the same quarter of the previous year. Net income for the quarter was $762.5 million, or an EPS of $0.47 per diluted share compared to $665.1 million, or an EPS of $0.43 per diluted share year on year.

Non-GAAP net income for the quarter, excluding acquisition-related, restructuring, and stock-based compensation expenses, was $823.4 million, or an EPS of $0.50 per diluted share compared to $743.1 million, or an EPS of $0.49 per diluted share, in the same quarter of the previous year. All these numbers have been adjusted to reflect the two-for-one stock split that became effective on Jan. 25, 2013.

For the full year 2012, total revenue was $9.70 billion, up 16% compared to $8.39 billion for the full year 2011. Net income was $2.59 billion, or an EPS of $1.64 per diluted share, compared to $2.80 billion, or an EPS of $1.77 per diluted share for the previous year. Non-GAAP net income for 2012, which does not include acquisition-related, restructuring and stock-based compensation expenses, was $3.08 billion, or $1.95 per diluted share, compared to $3.04 billion, or $1.93 per diluted share for the previous year.

As of Dec. 31, 2012, Gilead had $2.58 billion in cash, cash equivalents, and marketable securities against $9.96 billion as of Dec. 31, 2011. The decrease was caused by the acquisition of Pharmasset in the first quarter of 2012.  The company generated $3.19 billion in cash flow from operations in the full year 2012 and $705.7 million in the fourth quarter.

Phase 3 Studies - Sofosbuvir

Gilead reported  that two phase 3 studies evaluating its hepatitis C therapy sofosbuvir had both met their primary endpoints and the data from the trials would support its regulatory filing for sofosbuvir. The company hopes to file for sofosbuvir's approval with the FDA later this year. If it is approved, the drug, which Gilead acquired as part of its acquisition of Pharmasset, would be the first purely oral treatment for hepatitis C.

Analysts have estimated that the market for the disease could grow substantially in coming years, with a potential of $20 billion in revenue. Dr. Norbert Bischofberger, Gilead's chief science officer and executive vice president of research and development, commented "These data support the favorable clinical profile of sofosbuvir as the backbone of a potent, safe, and well-tolerated treatment regimen that is effective across a broad range of HCV patient genotypes. The sofosbuvir regimens in these trials allowed us to shorten the duration of effective hepatitis C therapy to just 12 weeks for treatment-naive patients with genotypes 1 through 6.”  The hepatitis C treatment may generate as much as $3.8 billion in sales by 2020, according to Credit Suisse Group which would make it one of the company's biggest products

The Moves Into Blood Cancer Treatment

In the last year, four drugs have been approved  in the United States to treat various forms of blood cancer.  Gilead's most-advanced experimental blood-cancer product is aimed at chronic lymphocytic leukemia, or CLL, a disease that progresses slowly and can require prolonged treatment that can require treatment over years, opening up multibillion dollar revenue opportunities.

CLL is one of the four main categories of blood cancer, along with acute myeloid leukemia, acute lymphoblastic leukemia and chronic myeloid leukemia  The drug, called idelalisib, was acquired in its February 2011 purchase of Calistoga Pharmaceuticals. Gilead has the credentials to succeed in this endeavor, which could produce another substantial revenue stream in addition to HIV and hepatitis C. Other blood cancers being pursued by Gilead include indolent non-Hodgkin’s lymphoma and myelofibrosis, a bone marrow disorder.

The Competition

Gilead's main competitor in the CLL market could well turn out to be Pharmacyclics (NASDAQ: PCYC), which also has an experimental therapy in the final stage of trials needed for FDA approval. Gilead’s drug is being tested in combination with other medicines, while the Pharmacyclics’ treatment stands alone. Pharmacyclics has been upgraded by TheStreet Ratings from hold to buy, and no significant weaknesses can be seen that are likely to mar the company's positive outlook. Against the current price of around $70, Wedbush Securities has a price target of $110.

In the area of hepatitis C, Microbiotix, a privately-held clinical stage biopharmaceutical company, has recently licensed Merck (NYSE: MRK) for worldwide rights  for the development and manufacture of MBX-700 and MBX -701 (formerly SCH 900942 and SCH 900188), two non-nucleoside inhibitors of the hepatitis C virus NS5B polymerase.  Merck is continuing to struggle right now, as it has been affected by weak earnings as well as a failed heart drug, Tredaptive, in December 2012. This combination means that an investment is not recommended at the present time.

U.S. health regulators recently approved GlaxoSmithKline's (NYSE: GSK) drug Promacta to additionally treat low platelet count in hepatitis C patients, which should let hepatitis C patients use a standard therapy to fight the disease. Although revenue is likely to be under pressure and an aggressive cost-cutting program will not help in the short term, Glaxo shows investment potential.  It should have multiple promising product launches this year as well as the results from several clinical trials.

AbbVie (NYSE: ABBV), the new pharmaceutical division of Abbott Laboratories, is developing its own experimental hepatitis C drug that is reported to have performed well in trials, but is unlikely to be available on the market soon.  This new company has people watching a drug named Humira. This one drug accounted for more than half of AbbVie's 2012 revenues, which should exceed $10 billion in revenue in 2013.  This blockbuster alone is a good reason to buy the stock.

Conclusion

Gilead is an extremely impressive company with strong results from its existing approved drugs, particularly in the HIV space. The company is showing a lot of growth potential in both the hepatitis C and blood cancer treatment businesses. I believe there is plenty of upside potential at current price levels, and I have no hesitation in recommending this stock to investors.


jordobivona has no position in any stocks mentioned. The Motley Fool recommends 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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