This News Makes Gilead the Top Healthcare Pick

Mohsin 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 one of the best positioned Biotechnology stocks. The company already has an excellent HIV segment which is a pioneer and leader in its own industry. The future valuations of Gilead are tied to the success of its much discussed Hepatitis segment. The company plans to provide alternative therapies for HCV which are more convenient and effective.

These ambitions are shared by Bristol-Myers Squibb (NYSE: BMY) and Johnson & Johnson (NYSE: JNJ) as both companies are working on a similar treatment for HCV. My research shows that the HCV solution by Bristol Myers and Gilead is way ahead of the competition. More interestingly for Gilead investors, the HCV drug combination being developed by Bristol contains Gilead’s Sofobuvir. This shows that Gilead is all set to dominate a market which can be worth more than $25 billion by the end of this decade.

Hepatitis C trials

Yesterday Gilead released data on two different studies aimed at assessing its Hepatitis C candidates. The company released 12 weeks data for both Fission and Neutrino. These studies test the effect of Gilead’s drug candidates on subjects with chronic hepatitis C virus (HCV) infection, who have never before received treatment for the disease.

Fission

The aim of this study was to compare the effect of Sofobuvir + Ribavirin as compared to standard of care PEG-IFN + RBV for 24 weeks. The study has been successful in providing evidence that Sofobuvir + RBV is just as effective as the standard treatment. The results show that both treatments resulted in 67% patients showing a virologic response. The real success for Gilead lies in the lesser adverse effects of Sofobuvir + Ribavirin as compared to the alternative. There were a higher rate of complaints of dizziness, nausea, headaches, insomnia and fatigue, from patients receiving Peg-IFN as compared to the one on RBV and Sofobuvir.

Neutrino

The aim of this study was to prove the superiority of adding peg-IFN to a combination of Sofobuvir and RBV. According to results, this combination was almost 30% more effective with 90% patients showing a sustained response. Approximately 20% subjects complained about fatigue, headaches, nausea, anemia and insomnia.  

Valuation

The stock has shed a few percentage points after the data was release to the market. I believe investor apprehension is totally misplaced and Gilead is all set to extend its lead to leadership on Hepatitis drug market. The results from both trials support my hypothesis that Gilead’s Hepatitis cocktail will receive the FDA nod. The combination is not only more effective than current treatments but also has fewer side effects. The FDA approval should come through by the end of 2013 and investors should expect the filling to take place by the end of 1H2013.

According to research there are approximately 170 million HCV patients in the world with almost 4 million in the United States alone. According to street estimates the market for HCV drugs can reach approximately $25 billion by the 2020. The stock is currently trading at a P/e of 13.8x, approximately 60% below industry averages. If we value the stock at a P/e of 25x and consensus EPS estimates, we can get a 2013 target price of $54; a return of approximately 40%. I believe my high multiple is justified by high growth rate expected from Gilead due to its HIV and Hepatitis portfolio.

Risks

At these levels Gilead is a low risk stock but there are still some risks attached to any stock investment. The management of Phase III will be critical to the success of its hepatitis and FDA approval for its cocktail. The company is not the only player looking to dominate the Hepatitis market. Bristol-Myers Squibb's and Johnson and Johnson both have candidates targeting a more comfortable cure to HCV.

Bristol-Myers Squibb is trying for a combination of its Daclastasvir and Sofobuvir. The Phase II results for the combination have been even better than Gilead’s attempts with approximately 93% cured as compared to 90% by Gilead’s candidate.  However as both drugs are manufactured by different companies, they will not enter the Phase III together but will apply for a combination therapy. The alternative being proposed by J&J is the weakest one with only 80% patients showing a virologic response to a combination of simeprevir, pegylated interferon and ribavirin.

 


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