Gilead Sciences: Great Quarter, Strong Anti-Viral Franchise Make It a Buy

Gilead Sciences (GILD) pleased its investors yet again with another quarter of great earnings. The biotechnology company from Foster City, California has truly proven to investors that they can withstand the tough economic conditions across the globe, even offering high priced drugs. More importantly, the company has built up a respectable reputation on the Street as being a “staple” biotech holding for anyone’s personal portfolio. As you have seen in my recent article concerning GDP Healthcare numbers that were reported, prescription-drug spending slowed to its lowest rate in 45 years. We will expand on how Gilead avoided industry-wide troubles later. For those anxious Gilead shareholders who were waiting on a Pfizer (PFE) buyout after some talk that they would try to make a large acquisition in order to gain exposure to biotech, I am very sorry. But, no need to dump your shares, Gilead is here to stay.

A Glimpse from Above

From a macroeconomic perspective, you might think you should steer clear of Biotech because of introduction of biogenerics to the American market. However, first there needs to be proven biotechnology drugs to even construct a generic form. In addition, who knows when legislation will actually pass through the White House; people are saying by the end of the year but with deficiencies within Medicare and Medicaid, the timeline may be pushed back. Moreover, from a top-down approach, the strongest areas within Biotechnology are oncology and HIV/AIDS, especially HIV/AIDS because of the many people actually diagnosed and the small percentage actually treated; many more have yet to be even diagnosed (I will show this later).

Will M&A in Biotechnology continue?

This is a very tough question to answer and I am sure it is on the minds of many Healthcare investors. Those holding onto Gilead, Amgen (AMGN), Genentech and Celgene (CELG) were praying (probably still are) for a buyout from large-cap Pharma due to the sector’s depressed revenues coming from patent expirations and lackluster “blockbuster” drug releases. The new news regarding Roche-Genentech (DNA) is very upsetting; a once friendly agreement has quickly changed into a hostile takeover. Why exactly has Roche decided to offer $86.50, short of the original $89 offer last year and about $20 less than analysts have been predicting? The question has been heavily debated across the Street since the news hit the headlines late Thursday night into Friday morning, and we will see how the shareholders react in the coming days.

Even moreso, I feel it will trickle down to companies such as Bristol-Myers Squibb (BMY), Schering-Plough (SGP) GlaxoSmithKline plc (GSK), AstraZeneca (AZN) and, here is a stretch, maybe even Johnson and Johnson (JNJ). Remember Gilead has a direct sales or partner promotion for Atripla with BMY in the U.S. as well as the EU, and with Merck in developing countries. They work with GSK on Flolan, Hepsera, and Letairis. Although I wouldn’t place your money in these stocks merely for taking the role of a hedge fund manager who is looking to benefit from increased M&A activity, I would still follow to see what develops and watch those firms sitting on top of cash. Pfizer (PFE) bought Wyeth (WYE) for a few reasons, but one was to gain some of their exposure to biotechnology. Do I think it is enough to withstand the next few years? No, but that is out of my hands and a discussion for another day.

So why is Gilead doing so well?

It is tough to answer that question in a succinct manner, but I will begin by saying they have the best product line focusing on HIV/AIDS. We will begin with a few key statistics:

• 30 million people worldwide are infected with HIV (more than 1 million are in the U.S.)
• of that 1 million infected in the U.S. only 540,000 are being treated with HIV drugs
• Sanford C. Bernstein analyst, Geoffrey Porges says, “Since August, the growth rate in new HIV drugs dispensed in the U.S. has doubled, from 5% to 10% annually”

Gilead has 3 behemoth anti-viral drugs: Truvada, Atripla, and Viread which on the year were up 33%, 74%, and 1% respectively from fiscal 2007 through 2008. The total anti-viral franchise for that same time period has increased 36% led by intense marketing and approvals from the European Union. Now why don’t we have a look at some specific Gilead statistics regarding the HIV market:

• more than 70% of all treated patients are receiving Gilead’s products
• more than 80% of treatment for new patients starting therapy are on a Gilead product
• Atripla is the most prescribed regimen in HIV with more than 31% of all patients
• Truvada is the most prescribed product in HIV with more than 34% of all patients

Note: Statistics are from the recent earnings release and presentation on the Company’s website

The U.S. patent expirations are not coming until at least 2017: Viread in 2017 and Truvada, Atripla, and Emtriva in 2021. Stability and brand recognition have been key for Gilead as well as great relationships with the FDA and EU who have supported the future growth of their products. This was seen when Truvada gained additional market share over its competitor Epzicom from GlaxoSmithKline when the U.S. Department of Health and Human Services gave it priority status as the only preferred drug regimen for newly treated HIV patients back in November.

Conclusion

With Return on Assets of 31.29%, Return on Equity of 52.84%, and Long-Term Growth Rate of 17.43% as well as very little debt, your investment is quite safe with this giant biotechnology company which is at the forefront of treatment for life-threatening illnesses.

-Ryan Savitz

Disclosure: The mutual fund that the author manages is long JNJ, DNA and GILD.

Comments

[Heath DiMaggio:]

I still think Healthcare is a good bet. No matter who's in office, people, businesses and Government will spend to make us healthy. We will work harder when were healthy and pay more taxes. Milestone Scientific (MLSS) looks like a good bet for a small health products company. It has a good sales force and a new and existing product line. The dental single tooth anesthisia makes sense. How many dentists are there in The country and elsewhere? Plus, they still have existing intstruments (products) to sell.

Feb 02 01:21 PM