Explaining Why Gilead Soared & Other BioPharma "Buys"

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If you are looking to get invested in BioPharma, the worst thing you want to do is buy when the market excitement has ended. The release of favorable data even for pie-in-the-sky ideas could send shares soaring on speculation. Fundamentally, however, the true underlying growth story prevails. Below, I review three BioPharma stocks with the intent of shedding light on their true growth stories.

Why Gilead Sciences (NASDAQ: GILD) Has Soared

As anyone watching the financial networks could tell you, Gilead has been on quite a roll. Over the last 12 months, it has has gained 88% in value. In the third quarter, the company delivered strong gains in all key areas. At the same time, the bears are not buying it: the short interest has risen by more than 40% in the last 2 reporting periods. So, who is right?

The biopharmaceutical producer focuses primarily on the STD market, which includes drugs targeting HIV/AIDS and hepatitis, but it also targets respiratory, metabolic, cancer, and cardiovascular conditions. It's not hard to see why the company has done well--it has had a steady pipeline where others have failed. In recent days, Gilead reported that its late-stage trial of an experimental HCV treatment, sofosbuvir, cleared the virus in nearly four-fifths of patients. This would be the first oral treatment for HCV, if approved, and would likely replace traditional injectables. A regulatory filing will be submitted in mid-2013 with a Phase III study results coming out 1Q13. This could be a game changer given that 170 million are believed to be infected worldwide.

Its HIV treatment has also performed well. The European Commission recently granted Viread marketing authorization for two new indications. This grants use for (1) pediatric patients that lack tolerance for first line agents and (2) those aged 12 to 18 suffering from the hepatitis B virus. In addition, Teva (NYSE: TEVA) has agreed to hold off introducing generics for Viread in light of a patent fight with Gilead. Furthermore, Complera showed superior efficacy to Altripia in treating HIV-infected adult patients. In a Phase II trial, TAF treatment for HIV-1 patients met its primary endpoint and will undergo further studies. It is no wonder then that Bank of America recently of America is calling the company a $95 stock, a 27% premium to the prevailing price. Lazard is even more optimistic and gives it a $100 price target.

Growth Drivers Of Merck (NYSE: MRK) & Pfizer (NYSE: PFE)

Although not nearly to the same extent, Merck and Pfizer have also done quite well for themselves. They are up around 18% over the past 12 months, and this has been reflective of excellent performance. Merck and Pfizer beat analyst expectations in 13 of the last 15 quarters. The problem, however, is that investors are still on the fence in light of patent cliffs. Pfizer generates a ROIC of 8.75%, which is 425 bps below the industry average. Merck is slightly better, but still below the industry average, with ROIC of 9%.

We then need to look at the growth opportunities. In a Phase Ib trial, Merck's MK-3475 treatment for advanced melanoma performed well. The study included 85 patients--43 of which had an "objective response" and 8 a complete response. This candidate is several in a new class of PD-1 inhibitor agents that assist the immune system. Gilead is also not the only biopharmaceutical producer making inroads in the STD market--Merck's oral treatment for hepatitis C, MK-5172, suppressed the virus in nearly all patients in its Phase II trail. The company's osteoporosis drug, Odanacatib, substantially increased the density of hip and spine bone mineral among menopausal women. In addition to a good pipeline, Merck has been cutting costs and restructuring operations to minimize inefficiency.

Pfizer is looking to grow less through organic momentum and more through M&A. It recently decided to acquire NextWave Pharmaceuticals in a deal valued at $255 million plus potentially $425 million worth of additional milestones. This provides the company great potential to penetrate the ADHD market, which has seen tremendous growth rates. Organically, the company's once-daily Lyrica for treating fibromyalgia, which effects 5 million Americans, has seen strong results. The Phase III trial met its primary endpoint, or reducing the time until pain compared to placebo. In addition, the FDA recently approved Xeljanz to treat rheumatoid arthritis in adult patients who could not be properly treated by methotrexate. This drug provides a nice complementary revenue driver to pick up the market share that Enbrel has not.

In light of the strong momentum experienced by both Merck and Pfizer, they both represent attractive investments. If nothing else, they provide a steady stream of income with dividend yields of 3.9% and 3.5%, respectively.

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