Gilead Could Be A Smart Play On Hepatitis C Market Growth

| About: Gilead Sciences, (GILD)

Gilead Sciences (NASDAQ:GILD) has acquired YM BioSciences (YMI) for $2.95 per share in cash. YM's lead drug candidate, CYT387, is an orally-administered, once-daily, selective inhibitor of the Janus kinase (JAK) family, specifically JAK1 and JAK2. The JAK enzymes have been implicated in a number of disorders, including myeloproliferative diseases, inflammatory disorders and even certain cancers. YM BioSciences has reported positive results from its Phase 1/2 clinical trial of CYT387 in 166 patients with myelofibrosis, a life-threatening myeloproliferative disease. A pivotal Phase 3 clinical trial of CYT387 in myelofibrosis may be initiated in the second half of 2013.

Gilead views the acquisition as an opportunity to add a clinical program in the area of hematologic cancers to its oncology portfolio. Based on the phase 2 data, CYT387 could provide important clinical benefits for patients with myelofibrosis, including potential improvements with regard to anemia and decreased dependence on blood transfusions. The drug will be moved into a Phase 3 clinical trial as soon as possible. Myelofibrosis is a progressive, chronic bone marrow disorder in which the marrow is replaced by fibrous scar tissue, making it difficult for the bone marrow to sufficiently produce blood cells, leading to anemia (low red blood cell count) and thrombocytopenia (low blood platelet count), severe constitutional symptoms and spleen enlargement. JAK inhibitors modulate cytokine-stimulated intracellular signaling and decrease the circulating levels of proinflammatory cytokines associated with the pathogenesis of myelofibrosis.

Competition in the HCV market

The size and potential of the global hepatitis C market has drawn a number of major pharmaceutical players. Microbiotix, a privately-held, clinical stage biopharmaceutical company, has recently entered into a licensing agreement with Merck (NYSE:MRK) that gives the company worldwide rights to develop, manufacture and commercialize MBX-700 and MBX-701 (formerly SCH 900942 and SCH 900188), two non-nucleoside inhibitors of the hepatitis C virus NS5B polymerase. U.S. health regulators recently approved GlaxoSmithKline's (NYSE:GSK) drug Promacta for the additional treatment of low platelet count in hepatitis C patients and this will provide hepatitis C patients with a standard therapy to fight the disease.

Bristol-Myers Squibb's (NYSE:BMY) has acquired Inhibitex - and the company's experimental hepatitis-C drug INX-189 (later renamed BMS-986094). The company recently halted studies on this compound due to safety issues that emerged in its Phase 2 trial and Idenix Pharmaceuticals (NASDAQ:IDIX) was also affected by this negative result. The FDA suspended the development of the company's experimental hepatitis-C drugs IDX184 and IDX19368, which belong to the same drug class as BMS-986094, until drug safety can be proved.

AbbVie (NYSE:ABBV), the newly-spun-off pharmaceutical division of Abbott (NYSE:ABT), is developing its own experimental hepatitis C drug that has shown impressive results in trials so far but is not expected to be commercially available for quite some time. Abbott met endpoints in its Phase 2b trial for ABT-450, which is an ex-interferon treatment for hepatitis C genotype I.

Buy Rating reiterated

Gilead has been reiterated by TheStreet Ratings as a buy with a ratings score of A-. The strengths of the company have been demonstrated in its revenue growth, stock price performance, reasonable valuation expanding profit margins and solid financial position with reasonable debt levels. Analysts believe that these strengths outweigh the below par growth in net income. Revenue growth has slightly outpaced the industry average of 5.4%. Since the same quarter of 2011, revenues have risen by 14.4%, but have been accompanied by a decline in earnings per share.

Gilead stock has jumped 76.13% since this same time last year, outperforming the broader market during that same time frame. The gross profit margin is currently very high at 76.90% and has increased from the same quarter in the previous year. The net profit margin of 27.83% is also above the industry average.

Earnings per share fell by 10.5% in the third quarter of 2012, compared to the same quarter in 2011, and earnings have been somewhat volatile. However, Gilead appears to be poised for EPS growth in 2013. During the past fiscal year, the company increased its bottom line by earning $3.55 per share versus $3.30 a share in the previous year. For this year, the market expects an improvement in earnings at $3.85 a share versus $3.55).

Gilead has a market cap of $59 billion and currently has a P/E ratio of 24.2 which is above the S&P 500 P/E ratio of 17.7. However, the company has a solid portfolio of drugs on the market as well as in the development pipeline and a dominant position in the HIV treatment market. The company has moved decisively to protect its franchise in the HIV market. It is now poised to make its mark in the large and lucrative hepatitis C treatment market, which should contribute substantially to future growth and earnings. Based on these developments I feel that Gilead would be a good addition to anyone's portfolio.

Disclosure: I am long GILD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.