This Biotech Will Go Even Higher

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

This year will be an interesting one in the biotechnology sector, with a number of news drugs on the way and big pharmaceuticals such as Pfizer (NYSE: PFE) and Teva Pharmaceuticals facing the patent cliff.

I have already discussed Pfizer’s strategy to ramp up its drug portfolio here and here. Last year, Gilead (NASDAQ: GILD) investors enjoyed their stock’s amazing run. The approval of Quad for HIV and Truvada’s FDA nod for AIDS prevention pushed the company’s stock to new heights. These approvals have already been priced in, but that doesn’t mean there are no catalysts left to further propel Gilead’s stock price.

The Phase III results of Ranolazine and the 2 for 1 stock split will have a positive effect on the company’s stock price. Apart from short term catalysts, Gilead is on the right track with a stellar drug portfolio and valuations show that even at these high levels, it still has a 22% upside.

Gilead

Gilead is involved in the discovery, development, and commercialization of drugs for the treatment of life threatening diseases affecting humans. The company has a drug portfolio which is dominated by drugs for Hepatitis C and AIDS and includes Emtriva, Viread, Truvada, and Atripla.

The company is currently focusing on increasing the utility of its HIV drug portfolio and diversifying into cardiovascular drugs. Its leading cardiovascular drug candidate, Ranolazine, is in Phase III clinical trials for the prevention of MACE (Major Adverse Cardiovascular Event). The drug targets patients with a history of chronic angina and who have "incomplete revascularization following percutaneous coronary intervention (PCI)."

One of Gilead’s latest conquests is the approval of Quad, which is estimated to have a peak sales potential of approximately $4 billion. This is a drug cocktail made from four different drugs and is aimed at patients who  have not undergone treatment for HIV before. This new cocktail will replace the existing three-medicine product, Atripla. This drug was a combination of Truvada and Sustiva from Bristol Myers Squibb (NYSE: BMY). This development will have an effect on both Bristol Myers Squibb and Gilead stock since Atripla sales were $3.2 billion last year.

The company has also received the FDA nod for the use of Truvada for HIV prevention. This would open up the target market to include everyone involved in high-HIV-risk professions.

Recent updates

The drugs mentioned above have already been priced into Gilead's epic run, during which the stock has almost doubled. However, more positives have surfaced recently which could propel the stock even higher.

Last month, Gilead announced that it has agreed to acquire YM Biosciences in a cash transaction for $2.95 per share. The acquisition is aimed at improving the oncology segment of Gilead. The deal would give Gilead the drug CYT387 for myelofibrosis (MF). The drug should enter phase III clinical trials in the second half of 2013.

The company has also announced a 2-for-1 split of its stock. Existing shareholders would receive one extra share of Gilead on the 7th of January and the market would reflect the new amount by month end. This move should increase the liquidity of Gilead and positively affect the stock price.

Finally, last month, Gilead announced positive news for its Hepatitis C cocktail. According to late stage trial results approximately 78% patients did not have the virus. The company is pushing for the use of Sofosbuvir and Ribavirin, in combination, for the treatment of Hepatitis C. This combination will replace the use of Interferon, which has some unpleasant side effects. According to Barclays, the drug has a peak sales potential of approximately $3.8 billion.

Valuations

In the last year, Gilead has given investors a return of approximately 100%. The approval of its various candidates has positively impacted the company’s valuations. The company stock is currently trading at a forward p/e of 17x, 20% below industry average. The sell side has a mean price target of $84 which is 12% above current valuations. If we use industry average multiple of 21x and consensus EPS estimate of $4.40, we can calculate a price target of $92, which is a 22% return on current levels. Therefore I believe even at these high levels, Gilead is a buy.


SmartEquity 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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