The Best Healthcare Bet

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

Gilead (NASDAQ: GILD) has been one of the most prolific investments in the healthcare sector. The company value has almost doubled in the last few years, and it continues to appreciate thanks to its stellar R&D. Gilead dominates the Hepatitis C Virus (HCV) treatment market, and the upcoming priority review of sofosbuvir can cement its HCV domination for years to come. It faces tough competition from Bristol Myers Squibb (NYSE: BMY) and Abbott Laboratories (NYSE: ABT) in the HCV space, though. Both powerhouses are coming up with their own Interferon/Ribavirin free HCV treatments.

Fundamentals

The recent two years have been like a dream for Gilead investors. The market capitalization of this innovative healthcare giant has increased by almost 160%, and by 100% in the last 52-weeks alone. This increase in investor confidence is a combination of a rich pipeline and exceptional fundamentals.

Gilead reported its quarterly results last month and fell slightly short of the market’s unreasonably high expectations. The Street was expecting Gilead to post an EPS of $0.50, but it managed $0.48 on revenues of $2.5 billion. The miss was due to a number of short term reasons, such as inventory drawdown and a rise in R&D. The sales miss is due to the estimates miss by Truvada and Atripla.

Gilead continues to work on its pipeline and has increased its R&D. There has been a slight decrease in SG&A expenses, which will continue to improve margins in coming quarters. The growth in Stribild and Complera was also unprecedented, and both drugs exceeded expectations. There are indications that the Stribild franchise will continue to grow due to increased usage of integrase inhibitors.

Meanwhile, Gilead continues to dominate the HCV market and has a worldwide market share of more than 80%. As the awareness grows in developing countries and HCV treatment penetration increases, this market will continue to outgrow expectations.

Pipeline Strength

Only a few companies can match the pipeline strength of Gilead. The company has a number of promising candidates in various stages of clinical trials. Every compound has a long way to go before it can reach the FDA decision table, and still fewer compounds receive the approval of governing bodies. That said, these approvals are not the only criteria for a company’s success. Provenge and Exubera are examples of drugs that failed miserably even after getting the FDA go ahead. This is where Gilead has been so successful. The company has not only managed to win approval for its drugs, but these drugs have also shown stellar market performance. This ability to exceed expectations makes the pipeline of Gilead so strong.

The company has more than 130 active studies assessing new compounds and combinations of existing therapies. According to recent reports, the FDA has granted a priority review to Gilead’s sofosbuvir. The regulatory authority will review the drug on Dec. 8. sofosbuvir is a revolutionary Hepatitis C treatment that will get rid of interferon. Interferon is the standard treatment for Hepatitis C, but it’s after-effects are highly unpleasant for patients. These after-effects include colds and muscle fatigue, among others. AbbVie and Bristol Myers Squibb are also working on their own Interferon-free Hepatitis C treatments. This priority review can be a significant setback to their ambitions of dominating this highly lucrative market.

HCV Market

The HCV market holds the key to long term growth in Gilead’s revenues, but the company faces tough competition from Abbott and Bristol Myers Squibb. Bristol Myers’s three drug combo for treating the disease has received a lot of positive feedback from the market. According to the company, the combo was able to cure 15 out of 16 patients. BMY’s HCV combo also avoids the use of ribavirin or Interferon, which leads to a number of highly unpleasant side effects.

Abbot Laboratories is also working on an oral drug trio (a combination of ABT-450, ABT-333 and ABT 267) for the treatment of HCV. The mid-stage results of company’s Aviator trial were released late last year and showed unprecedented cure rates in HCV patients. According to released data approximately 93% patients who had failed previous therapies showed SVR (Sustained Virologic Response). This high success rate after 12 week treatment, and especially without the use of ribavirin, is a good sign for Abbott.

The most successful combination for the treatment of HCV is sofosbuvir and Bristol’s Daclastavir. This is the only combination with a 100% success rate while not using Interferon or Ribavirin. However, there are very little chances that this combination will get approval. BMY and Gilead both want to completely control their products and market their own complete treatment. There is always the possibility that doctors will use this combination off-label, but even then the costs will be too high for the masses.

According to Bloomberg, there are approximately 3 million Americans infected with the virus and over 170 million infected patients worldwide. The market can grow to over $20 billion by 2020 and Gilead will continue to be the market leader. The Street expects Gilead’s HCV sales to exceed $4 billion by 2020, with Abbott in second at around $3 billion and BMY garnering around $1 billion to $1.5 billion. Positive outcomes from the December hearing can further increase Gilead’s market share.

Bottom-line

Gilead is one of the best long term bets in the healthcare sector. The company has the strongest HCV pipeline, which can earn the company around $4 billion by 2020. Gilead’s value has already increased almost 160% in the last two years, and it doesn’t plan on stopping here. At current valuations Gilead is still a bargain and investors should consider it a long term option for its stellar HCV franchise, AIDS-therapy domination, and a rich pipeline. 

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Mohsin Saeed 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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