Is Gilead Sciences Still A Good Buy?

| About: Gilead Sciences, (GILD)

The third quarter of 2012 was the strongest in Gilead Sciences' (NASDAQ:GILD) history, with solid performances across all therapeutic areas.

Gilead experienced a year-over-year gain exceeding 60%, The stock has also outperformed the broader S&P 500 Index (SPX) by nearly 15 percentage points during the past 60 sessions, but short interest on the stock has increased by over 40% during the last two reporting periods.

Gilead Sciences, Inc. is a research-based biopharmaceutical company whose therapeutic areas of focus include human immunodeficiency virus/acquired immune system (HIV/AIDS), hepatitis, serious respiratory, cardiovascular, and metabolic conditions, cancer and inflammation.

The company's portfolio of 15 marketed products includes a number of category firsts, including Atripla (emtricitabine/tenofovir/efavirenz) and Truvada (tenofovir/emtricitabine), the first agent approved in combination with safer sex practices to reduce the risk of HIV-1 in high-risk uninfected adults, a strategy called pre-exposure prophylaxis (PrEP).

Gilead was founded in 1987 in Foster City, California. In 25 years, Gilead has become a leading biopharmaceutical company with a rapidly expanding product portfolio, a growing pipeline of investigational drugs and approximately 5,000 employees in offices across four continents.

Gilead has more than 75 Phase 2 and 3 clinical studies evaluating compounds with the potential to become the next generation of innovative therapies for HIV, hepatitis, serious respiratory, cardiovascular and metabolic conditions, cancer and inflammation.

In 2011, Gilead's annual revenues reached approximately $8.4 billion, and in 2009, BusinessWeek ranked Gilead #1 in its annual listing of the 50 Best-Performing Companies.


An estimated three million Americans are believed infected with hepatitis C (HCV), and as many as 170 million people are infected worldwide. HCV is the major reason for liver transplants in the United States.

Bristol-Myers Squibb (NYSE:BMY), Vertex Pharmaceuticals (NASDAQ:VRTX), Abbott Labs (NYSE:ABT), Merck & Co. (MRK) and Achillion Pharmaceuticals (NASDAQ:ACHN), are all competing with Gilead for the top spot in the HCV market estimated to be worth up to $20 billion.

Several HCV drugs approved were approved by the US Food and Drug Administration (FDA) last year. Vertex's Incivek (telaprevir) and Merck's Victrelis (boceprevir) both had good cure rates and cut treatment times to as low as 24 weeks, but these drugs must still be taken with interferon, an injected drug that often causes severe flu-like symptoms that have caused many HCV patients to delay or discontinue treatment.

During the summer of 2012, Gilead reached new highs after competitor Bristol-Myers Squibb suspended their trial of a competing hepatitis C treatment, known as BMS-986094, after a patient participating in a trial of the drug died of heart failure. Bristol took a $1.8 billion charge on the hepatitis C drug failure.

Vertex has announced collaborations with GlaxoSmithKline (NYSE:GSK) and Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson (NYSE:JNJ) to work on various potential HCV treatments.

Vertex is working on another HCV pill designated as VX-135. Vertex is hoping that VX-135 can become part of an HCV regimen that eliminates the need for interferon.

In separate studies with GSK and Janssen, VX-135 will be tested in combination with pills made by those companies. Studies are scheduled to start in early 2013.

Following positive results from a Phase 1a trial for its ACH-3102 drug, Achillion Pharmaceuticals has initiated a Phase 2 trial evaluating the drug. The company said the drug showed "robust antiviral activity" in its trial. ACH-3102 received fast-track designation from the FDA in May. Some speculate that Achillion could be an attractive takeover target by Merck, Roche (NYSE:ROG), Gilead and others.

At the 2012 annual meeting of the American Association for the Study of Liver Disease (AASLD), Bristol-Myers reported results showing that the combination of three of their experimental medicines -- daclatasvir, asunaprevir and BMS-791325 -- cleared HCV in 94% of 16 patients in a trial. The company plans to take the therapy into Phase 3 trials in 2014.

Also at the AASLD meeting, Abbott Labs presented data from a Phase 2 trial that found that a trio of oral medicines produced by the company to treat HCV produced impressive cure rates in patients who had failed to benefit from standard treatment. The study also found that the drugs had very high cure rates for newly treated patients.

The Abbott drugs are a protease inhibitor called ABT-450, the polymerase inhibitor ABT-333 and the NS5A inhibitor ABT-267. The drugs work without interferon. Abbott said it plans to move ahead with large Phase 3 studies of the three drugs, used either with or without the antiviral pill, ribavirin.

The study found that 93% of patients who failed prior therapy had a sustained virologic response (SVR), after taking the three drugs and ribavirin for 12 weeks, and that approximately 97% of previously untreated patients were considered cured after 12 weeks of treatment with the three Abbott drugs, plus ribavirin. The study found that 87% of previously untreated patients were considered cured after 12 weeks on Abbott's three drugs without ribavirin.

The combination regimens from Abbott and Bristol-Myers do not include nucleotide polymerase inhibitors, also known as "nuc's," which many experts believe show great promise as a therapy for HCV. The quest for "nucs" led to Gilead's $11.2 billion purchase of Pharmasset Inc. to acquire GS-7977, also known as sofosbuvir. Bristol-Myers also acquired a nucleotide, spending $2.5 billion for Inhibitex Inc.

At the AASLD meeting, Gilead reported study results even more impressive than those announced by Abbott. There was a 100% cure rate among previously untreated HCV patients who took only two of its oral treatments, plus ribavirin, for 12 weeks.

On November 27, 2012, Gilead Sciences said a late-stage trial of sofosbuvir, the company's experimental HCV treatment, showed that the HCV virus was not detected in 78% of patients taking the drug.

If approved, sofosbuvir will be the major component of the first all-oral combination regimen to treat HCV, eliminating the need for traditional injectable drugs.

Gilead expects to submit its first regulatory filings for sofosbuvir by mid-2013,

Two additional Phase 3 studies of sofosbuvir in genotype 2/3 patients are underway with results expected in the first quarter 2013. Phase 3 studies of sofosbivir in the more prevalent genotype 1 hepatitis C patient population are also being conducted, with results expected next year.

Gilead's FDA approved liver disease drugs include Hepsera (adefovir dipivoxil), a once-daily oral NtRTI for the treatment of chronic hepatitis B, and Viread (tenofovir disoproxil fumarate), a once-daily oral NtRTI for the treatment of chronic hepatitis B virus (HBV) infection in adults with compensated and decompensated liver disease


According to the Joint United Nations Program on HIV/AIDS (UNAIDS), there are 34 million people in the world living with HIV, about half do not know their HIV status. Over the past two years, the numbers of people accessing treatment has increased by 63% globally, but an estimated 6.8 million people are eligible for treatment and do not have access. Despite the encouraging progress in stopping new HIV infections, the total number of new HIV infections remains high - 2.5 million in 2011.

There are more than two dozen HIV drugs on the market. Of these, many are combinations of different drugs formulated to suppress resistance to the virus or reduce medication side-effects. Combination therapy often involves cross-licensing where pharmaceutical companies agree to market each other's drugs, sometimes referred to as "drug cocktails."

According to a Research and Markets report, in 2011, Gilead was the leader in the world's top seven HIV markets, with 36% of market share. Bristol-Myers Squibb was second with 16%, while ViiV Healthcare came in third with a 13% segment. ViiV Healthcare was established in 2009 as a specialty HIV company with GSK owning 85% and Pfizer (NYSE:PFE), owning 15%. In October 2012, equity positions were revised to GSK having 76.5%, Pfizer holding 13.5% and Shionogi 10%. Shionogi joined as a shareholder in October 2012. The company's aim is "to take a deeper and broader interest in HIV/AIDS than any company has done before and take a new approach to deliver effective and new HIV medicines as well as support communities affected by HIV."

Gilead has developed several blockbuster HIV drugs. In 2004, Gilead launched Truvada (tenofovir/emtricitabine), a once-a-day, one-pill combination of two drugs. In 2006, the company began marketing Atripla, a once-a-day, one-pill combination of Truvada and Bristol-Myers Squibb's efavirenz. Atripla's average wholesale price in the United States is nearly $25,000 per patient, annually. In 2011, global sales reached $3.2 billion.

In July 2012, the FDA approved Truvada as a prophylactic to protect healthy people from contracting the virus. In August, the FDA approved Stribild, also known as the "Quad" pill, which is the simplest, one pill a day combination drug developed to date.

Datamonitor estimates that sales of antiretroviral drugs in United States and the five biggest European markets reached $13.3 billion in 2011. Datamonitor predicts that growth will slow after 2017, as many drugs lose patent protection and prices fall as a result.

GBI Research found that the HIV/AIDS therapeutics market in the top seven markets was valued at $13.5 billion in 2011, increasing at a Compound Annual Growth Rate (OTCPK:CAGR) of 12.5% during 2004-2011. GBI projects that the market will grow 7% from 2011-2018 to reach $21.8 billion. The growth is primarily driven by the increase in the use of single dose multi-class combination drugs such as Atripla and Complera. With the recent launch of Stribild (previously known as Quad), the multi-class combination drugs would drive the market as a number of top selling medicines go off-patent.

As a consequence of numerous patent expirys, this predicted growth rate is less than the market experienced in the past. Between 2004 and 2011, the market experienced a CAGR of 12.5%, but due to the impending patent expirations of top selling drugs such as Bristol-Myers Squibb's Sustiva (efavirenz) in 2013 and Reyataz (atazanavir) in 2017, the firm forecasts a smaller increase.

Gilead's Atripla (efavirenz/tenofovir/emtricitabine), experienced a global revenue increase from $2.9 billion in 2010 to $3.2 billion in 2011, while the company's new potential top seller Stribild is expected to sell extremely well, says GBI Research.

Although Stribild's initial price was set at $28,500, which is one-third more than that of Atripla, GBI does not believe this higher cost will hinder the drug's sales.

In October 2011, Decision Resources forecast that the dominance of Bristol-Myers Squibb/Gilead's Atripla in the HIV drug market will be challenged over the next decade by two emerging fixed-dose combination products - Gilead's Stribild and Gilead/Janssen's Complera. Decision Resources predicted that Stribild would become the market leader by 2020 with more than $3 billion in sales in the United States, France, Germany, Italy, Spain, the United Kingdom and Japan.

Gilead's product sales increased 14% to $2.36 billion for the third quarter of 2012 compared to $2.07 billion for the third quarter of 2011. This increase in product sales was due primarily to Gilead's antiviral franchise, resulting from increased sales of Complera/Eviplera, Atripla,and Truvada as well as the launch of Stribild.

In July 2012, Shionogi-ViiV Healthcare claimed that dolutegravir, their experimental once-daily AIDS drug proved better than Gilead's Atripla in a late-stage clinical trial.

Dolutegravir, which could reach the market in late 2013, belongs to a novel class of drugs known as integrase inhibitors that fight HIV/AIDS by blocking the virus causing the disease from entering cells.

The study found that dolutegravir's superior efficacy was the result of 10% of those on the Atripla drug withdrew from the trial due to side effects versus 2% of those taking dolutegravir.

Could dolutegravir topple Gilead from the top of HIV drug market? Some analysts believe dolutegravir is a potential multi-billion-dollar-a-year seller. Others believe Gilead will stay on top, especially since dolutegravir contains Epzicom, which was shown to have higher rates of heart attack than Gilead's Quad in an earlier study.

Other Drugs

Although best known for its HIV/AIDS and hepatitis franchises, Gilead also markets cardiovascular, respiratory and ophthalmic medicines.

Cardiovascular drugs include Letairis (ambrisentan), a once-daily treatment to improve exercise ability and delay clinical worsening in pulmonary arterial hypertension, Lexiscan (regadenoson) injection, the first adenosine receptor agonist approved for use as a pharmacologic stress agent in radionuclide myocardial perfusion imaging studies, and Ranexa (ranolazine), an extended-release tablet for the treatment of chronic angina.

Respiratory drugs include Cayston (aztreonam for inhalation solution), an inhaled antibiotic indicated to improve respiratory symptoms in cystic fibrosis (NYSE:CF) patients 7 years of age and older with Pseudomonas aeruginosa infection, and Tamiflu (oseltamivir phosphate), the first neuraminidase inhibitor tablet for the treatment and prevention of influenza A and B.

Other Gilead drugs include AmBisome (amphotericin B liposome for injection), a treatment for life-threatening, systemic fungal infections in adults, Macugen, (pegaptanib sodium injection), an injection for the treatment of neovascular age-related macular degeneration (also known as "wet" AMD), an eye disease that destroys central vision in elderly patients, and Vistide (cidofovir injection), an antiviral injection for the treatment of cytomegalovirus retinitis in adult patients with AIDS.


For the quarter ended September 30, 2012, Gilead's total revenues increased 14 percent to $2.43 billion, from $2.12 billion for the third quarter of 2011. Net income for the third quarter of 2012 was $675.5 million, or $0.85 per diluted share compared to $741.1 million, or $0.95 per diluted share for the third quarter of 2011. Non-GAAP net income for the third quarter of 2012, which excludes acquisition-related, restructuring and stock-based compensation expenses, was $788.9 million, or $1.00 per diluted share, compared to $795.2 million, or $1.02 per diluted share for the third quarter of 2011.

As of September 30, 2012, Gilead had $2.65 billion of cash, cash equivalents and marketable securities compared to $9.96 billion as of December 31, 2011. The decrease was due to the acquisition of Pharmasset in the first quarter of 2012. Gilead generated $2.49 billion of operating cash flow during the first nine months of 2012 including $745.4 million generated in the third quarter of 2012. The operating cash flow for the first nine months of 2012 includes the collection of $460 million of accounts receivable in Spain.

Gilead continues to deliver strong year-to-date and third quarter financial results. Product sales for the third quarter were $2.36 billion, an increase of 14% year-over-year. US sales amounted to $1.4 billion of product sales, up 20% year-over-year. The increase was driven by strong retail demand and the expansion of the company's HIV franchise.

From an expense standpoint, non-GAAP R&D expenses increased to $384 million, up 42% year-over-year, primarily due to the continued advancement of Gilead's product pipeline and in particular, the progression and expansion of our Phase 3 studies in both liver disease and oncology.

Given the strong year-to-date commercial performance, the company is increasing product sales guidance for full year 2012 to $9.1 billion to $9.2 billion, which represents a $200 million increase from the top end of Gilead's previous guidance range.

Gilead's anti-viral franchise grew by 13% year-over-year and delivered over $2 billion in product sales, while cardiovascular products delivered quarterly sales of over $200 million for the first time. HIV sales in the U.S. were particularly robust and grew by 19% year-over-year.

Conclusion: Buy

This month, Guggenheim began coverage of Gilead and put a "Buy" rating on the stock. Deutsche Bank reaffirmed their "Buy" rating. Gilead also had its "outperform" rating reaffirmed by analysts at BMO Capital Markets which put a $89.00 price target on the stock. Both Lazard and Stifel Nicolaus put a "Buy" rating on the stock. Lazard increased their price target from $89.00 to $100.00. Stifel Nicolaus upped their target price from $80.00 to $85.00. Analysts at Sanford C. Bernstein reiterated their "Outperform" rating and put an $84.00 target price on the stock.

In October, Zacks reiterated their "neutral" rating on Gilead and placed a $72.00 price target on the stock. Needham & Company raised their price target on shares of Gilead Sciences to $75.00 in a research note to investors on Wednesday, October 24th. They now have a "buy" rating on the stock. BMO Capital Markets reiterated their "outperform" rating on Gilead Sciences placing a $89.00 price target on the stock.

Gilead currently appears to have a lead on its competitors in the development of a new HCV drug that represents a potential $20 billion market. Not only is the efficacy of the Gilead drug impressive, but it appears Gilead will offer a simple but effective one pill, once a day regimen that both physicians and patients will favor over competitors' multi-drug combination drug cocktails.

It also appears likely that Gilead will be able to maintain or even improve their substantial lead in the HIV drug market. Although some believe dolutegravir is a strong contender, the association with increased heart attack risk render those contention doubtful.

All this adds up to a multi-year, multi-billion dollar revenue opportunity for Gilead Sciences, which could result in a mutually beneficial relationship for Gilead and the prudent investor.

Disclosure: I am long GILD, MRK, ACHN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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