The Race to Cure Hepatitis C Has this Stock Soaring

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There has been a tremendous race to develop the leading treatment for hepatitis C. While the market potential is huge, there is significant emerging competition, so I encourage you to look at other catalysts and the growth rate of the existing drugs. Below, I review 3 companies that are engaged in the HCV market with a focus on growth, catalysts, and clinical data.

Has Gilead Sciences (NASDAQ: GILD) Peaked?

Gilead Sciences is a biopharmaceutical company that predominantly focuses on the STD market. Its hepatitis C candidate, sofosbuvir (acquired through the $11 billion takeover of Pharmasset earlier this year) addresses a market 170 million individuals strong worldwide. The market for new therapies has been estimated to be worth $20 billion by 2020. In the Phase II study, all of the 25 patients were cured of the virus after a 12 week treatment. In the Phase III Positron study, 78% of genotype 2 or 3 patients were free of hepatitis C after a 12 week treatment. Bristol-Myers Squibb's (NYSE: BMY) failed drug Inhibitex, which it paid $2.5 billion for, creates a strong opening for Gilead to deliver. Bristol's experimental drug, BMS-986094, resulted in nine hospitalizations and one death.

With that said, there is still competition. Abbott's (NYSE: ABT) hepatic C drug is also in a Phase III trial. Its experimental drug cured hepatitis C in 99% of patients in 571-member study. In a separate but still important matter, the company is expecting to complete the spin off of AbbVie by the beginning of next year. So, if you are looking to invest in the company, you need to be mindful that the company is going with considerable restructuring. Abbott has said that it will lay off 550 workers in mid-October and plans to lay off several hundred more workers next year. This cost cutting measure is impressive in light of how profit surged and expenses plunged in the third quarter.

All things considered, I believe Gilead has much of its upside factored into the stock price. It has doubled from the 52-week low and is near an all-time high valuation of $56 billion. The Street is still bullish and has a consensus price target that is around a 11% premium to the current market assessment. But Abbott is cheaper at 15.9x past earnings versus 23.1x for Gilead. It has grown at a double-digit rate over the past 5 years and still is forecasted for a high single-digit rate over the next 5 years. Moreover, its HCV drug has delivered strong results and still failed to generate the kind of returns that sofosbuvir did for Gilead.

Why You Should Buy Bristol Myers

What about Bristol's catalysts? The company certainly could need catalysts in light of the $240 million miss on revenue of $3.73 billion and plunging sales of Plavix and Avapro from exclusivity losses. Eliquis, which it is developing alongside Pfizer, reduced the risk of vein and lung clots by 81% compared to placebo in a year-long study. And, in mid-November, the company released results at the American Association for the Study of Liver Diseases that a combination of Peginterferon lambda-1a, daclatasvir, and ribavirin achieved a superior rate of sustained virology response against hepatitis C.

Bristol has also meaningfully increased scale with the $7 billion purchase of Amylin Pharmaceuticals. This deal substantially increases the company's diabetes portfolio and allows for meaningful revenue synergies. The company already generates more free cash flow than what the market recognizes. In the third quarter of 2012, $7.2 billion in free cash flow was generated--a yield of 13.4%. Its return on invested capital also stands at an impressive 18.2%, which is 522 bps greater than the industry average. Analysts forecast that the company will grow EPS by an annual rate of 6.3% over the next 3-5 years.

Going forward, there are several reasons to be optimistic. Gross margins have been guided to expand 100 bps, and they are trending in this direction. This is particularly impressive in light of R&D expenses being around $200 million higher than what Goldman Sachs forecasted. Continued growth in Baraclude, Sprycel, and Orencia, particularly in China, makes me bullish about the top-line as well as the bottom-line.

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