Gilead Sciences - Keeping Up With The Times And Winning

Apr.15.13 | About: Gilead Sciences, (GILD)

Gilead Sciences' (NASDAQ:GILD) M&A activities as well as its drug pipeline status indicates that its management has the foresight and leadership required to maintain flexibility in its business model. This is what makes it a consistent and reliable winner. The survival of drug companies in the current healthcare scenario is becoming exceedingly challenging as blockbuster models are failing and giving way to more diversified and partnership-oriented businesses. Gilead impresses me because it started at a time when creating a blockbuster drug and milking its worth was the trend in the pharmaceuticals industry, but it never became massively dependent on a few blockbusters unlike several of its industry counterparts which are floundering today. Some analysts are worried that Gilead has been on an "aggressive" acquisition spree for mysterious reasons. However, a close look reveals that Gilead's strategy is sound and well deliberated.

Establishing a core competency

In the initial years Gilead spent time establishing its core competency in the antiviral space when there were no complete regimens for HIV. About five years ago it overtook GSK (NYSE:GSK) to become the world leader in producing HIV drugs. Its HIV products include the only complete regimens for the deadly viral infection, Atripla (FDA approved in 2006), Complera (FDA approved in 2011) and Stribild (FDA approved in 2012). Additionally, it launched the first HIV prevention product, Truvada, for prevention in uninfected adults at high risk. This method is known as pre-exposure prophylaxis (PrEP). Its product, Viread, helps treat HIV in patients as young as 2 years old.

In its fight against HIV, Gilead created the complete drug arsenal required for combat and was the first to do so. This gave it a very strong position in the realm of HIV treatment. First mover's advantage coupled with high quality products helped Gilead establish its name quickly.

And here's what differentiates Gilead from several other biotech companies: it did not sit complacently at the top without planning for the future. Gilead was moving towards other targets in the area of viral infections. Viread, which had been approved for HIV treatment was further shown to be useful in treating the hepatitis B virus. Also, in 2011, with the acquisition of Pharmasset, Gilead took the lead in treating hepatitis C with Sofosbuvir. At the same time, the company had taken steps in the past few years to expand its horizons beyond antivirals.

Going beyond viruses

Cardiovascular and respiratory

Gilead knew that simply expanding its antiviral product portfolio would not take it very far along the growth trajectory it was aspiring for. Continuing with its mission to find solutions to life threatening diseases, the company headed towards the cardiovascular and respiratory space with 2 acquisitions in 2006.

Through the acquisition of Corus, Gilead entered into the area of respiratory infections. Corus was developing aztreonam lysine for the treatment of cystic fibrosis patients infected with Pseudomonas aeruginosa. The other acquisition was Myogen which had two drugs in development, ambrisentan and darusentan, and one marketed product (Flolan) for pulmonary hypertension. Rather than stepping out afresh into the cardiovascular and respiratory areas on its own, it was wise on the part of Gilead to have used acquisitions to enter into these realms. While some people question why Gilead would want to branch out from its antiviral franchise and perhaps threaten its well established image, it makes sense for the company to diversify rather than keep all its eggs in one basket. Failing in these therapeutic areas or not being able to achieve the same level of success in these segments as it did with antiviral medications, would not take away from its secure position in the antiviral market.

Oncology and inflammation

I am also in favour of the 2013 YM Biosciences acquisition. Gilead got a new drug candidate, which is a selective inhibitor of the Janus kinase (JAK) family. The JAK enzymes have been implicated in several disorders such as myeloproliferative diseases, inflammatory disorders as well as certain cancers. Studying molecules which impact such a wide variety of diseases, I believe, is a smart approach because successfully creating a solution for maybe one or two disorders then becomes a stronger possibility.

Since June 2010, Gilead has been involved in several acquisitions that are bringing in interesting oncology product candidates into its portfolio. The acquisition of Calistoga Pharmaceuticals gave Gilead idelalisib, which targets a molecule (delta variation of PI3 kinase) which is involved in tumor growth and proliferation. This has been one of the most sought after targets in cancer biology for several years. Calistoga had some promising data from early clinical trials which indicated that the drug was effective with patients suffering from chronic lymphocytic leukemia, slow-growing non-Hodgkin's lymphoma, and mantle cell lymphoma. Gilead's choice to acquire Calistoga looks like a deal that will reap great rewards in the near future.

Many companies have still not realized the importance of not just going after growing therapeutic areas which cover large markets, but also investing in smarter R&D practices that will ensure greater chances of developing successful treatments. No doubt the oncology and inflammatory disease markets are huge and growing, and Gilead will profit greatly if it can create one or more winners in these areas. What's even better is that Gilead is going about it in a sensible way.

The right things happening to make Gilead a buy

Gilead and J&J (NYSE:JNJ) are competing with Abbott Laboratories (NYSE:ABT), Bristol-Myers Squibb(NYSE:BMS), Merck (NYSE:MRK) and Vertex (NASDAQ:VRTX) in developing oral hepatitis C treatments. Gilead seems to be leading the race. Sofosbuvir, the drug Gilead acquired in 2012 has successfully completed 4 Phase III studies. In all 4 studies the sustained virologic response far exceeded the targeted level. Sustained virologic response is the objective in hepatitis C treatment and it means that the virus is down to undetectable levels in the blood. Sofosbuvir is turning out to be a strong candidate and can be used in combination therapy with other drugs as well.

Gilead is has an operating margin of 41.6% which compares very well against those of some of its competitors such as GSK (29%), PFE (33%) and Roche (34%). Its return on equity of 31.35% and profit margin of 26.7%, are well above the industry averages of 8.8% and 10.1% respectively.

Conclusion

Gilead did not sit atop a peak without carving out a future path for itself. This is the reason the company has an exciting pipeline and much for investors to look forward to today. It has kept up with the times by going forward with meaningful partnerships and diversifying beyond its comfort zone. The company's strategy is one many other biotech firms can learn from in devising their plan for growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.