Gilead Looks Good on Strong Sales and Pipeline

By Jason Napodano, CFA

Business continues to look strong for Gilead Sciences (GILD). The company’s tenofovir-based HIV products (Viread, Truvada and Atripla) are number one and widening their lead. The clinical data continues to support the switching of patients from older generation molecules such as abacavir and lamivudine to Gilead’s franchise. Also driving impressive trends are revised HIV treatment guidelines from the U.S. Department of Health and Human Services recommending only Truvada (and Atripla) as the backbone of choice in naïve patients.

These new guidelines, put into place in November 2008, downgraded Epzicom to an alternative medication based on cardiovascular risk and high rates of virologic failure. Finally, the new FDA chief, Margaret Hamburg, a former New York City Health Commissioner, has significant experience in combating infectious disease, such as HIV/AIDS, and we believe that this type of focused leadership only further adds to the market potential for Gilead’s core products.

Outside of the core-HIV franchise, business is also progressing nicely. In August 2008, the FDA granted marketing approval for Viread as a once-daily treatment for chronic hepatitis B (HBV) infection. In only a few months on the market, management estimates that Viread has 26% new market share (NRx), eclipsing the market share of Glaxo’s (GSK) Epivir and Gilead’s Hepsera in the HBV category. Going forward, Gilead will focus its HBV efforts solely on Viread.

Letairis sales are also ramping to within our expectations. Two year safety and efficacy data presented at CHEST in October 2008 and ATS in May 2009 should continue to drive strong uptake for the drug. Prescriptions have doubled over the past 12 months.

Gilead’s pipeline is also moving forward with the recent positive phase III DAR-311 data, and several programs moving into phase II and phase III for HCV and HIV. The most advanced, elvitegravir, is currently in a phase III trial with data expected later in 2009. Management recently got some good news from the FDA regarding the phase III requirements for elvitegravir and GS-9350 which should help speed along the process.

Add in Ranexa, Lexiscan, and a handful of other early-stage cardiovascular product candidates at CVT, and Gilead’s future looks very bright. The only mishap over the past few months came in September 2008 when the FDA rejected the new drug application for aztreonam lysine for cystic fibrosis. Despite the delay, we still see aztreonam lysine as a viable product, evidenced by management’s commitment to initiate a phase II trial in non-CF bronchiectasis.

With respect to the CVT acquisition, we applaud the move and think it is a positive strategic step forward for Gilead. CVT’s core focus in cardiology with chronic angina drug Ranexa represents an effective forward integration for Gilead, a company with a phase III candidate for resistant hypertension in darusentan. Gilead will maintain CVT’s 170 sales reps focused on Ranexa for the next several quarters. CVT just recently received approval expanding the label indication and removing significant cautionary language that was previously inhibiting Ranexa’s U.S. ramp.

We think Ranexa, in the U.S., has $500 million potential given the new label and effective promotion. Outside the U.S., Gilead will look to leverage the existing relationship with Menarini by helping to facilitate pricing and reimbursement efforts in Europe with Gilead’s infrastructure.

Gilead will also look to monetize the Ex-U.S. rights for Lexiscan, and reiterated CVT’s previous guidance to file for Lexiscan approval in Europe shortly. Once approved, perhaps in 2012, Gilead will utilize the CVT sales force to promote darusentan. In the meantime, Gilead expects to leverage CVT’s knowledge in developing and commercializing cardiovascular drugs to enhance the darusentan filing.

We view the acquisition of CVT by Gilead as a great, cost effective, opportunity for Gilead management to gain the knowledge and put the necessary infrastructure in place to diversify into the cardiovascular business, all while increasing revenues and eventually profitability immediately with Ranexa.

Gilead remains one of our favorite stories in biotech, and we recommend opportunistic buying at this level given the pull-back in the overall market. Upside to the story could come from the successful development of elvitegravir or darusentan, or ramping Ranexa above the current Street consensus. We would be aggressive buyers if the stock dropped below $40. Our target is $50.

Comments

[InnocentsAb...:]

Just reading your article, vs. the apparent pipeline for Merck, sounds as if Gilead should be purchased by Merck, if not just for the potential of the anti virals and even cardiovascular meds.

I'm going to do a little comparison of the current capitalizations.

Jun 08 02:26 PM

[J. Napodano:]

That would certainly be an excellent acquisition for Merck. I think it makes sense strategically for them to acquire Gilead (or Celgene) in an attempt to enhance the top-line. But, I think Merck has its plate full right now with Schering-Plough. Bristol-Gilead makes a lot of strategic sense too, but Bristol is actually smaller than Gilead on a mcap value!

Jun 08 03:58 PM

[Michael Del...:]

I think we all agree Gilead is a great biotechnology company and the products that they are developing will help to improve quality of life. But a great company does not always make a great investment. The reason it keeps revisiting the $42 - $44 range is that there are now people in Washington who truly believe that they know what's a "fair" price for these new products. And their decisions could seriously affect Gilead's bottom line.

"I know what you're thinking. Did Nancy Pelosi/Harry Reid/Barney Frank/Barack Obama fire six shots or only five? Well, to tell you the truth, in all this excitement, I've kinda lost track myself. But being as this is pricing issue a .44 Magnum, the most powerful handgun in the world, and would blow Gilead's head clean off, you've got to ask yourself one question: Do I feel lucky? Well, do ya, punk?"

Jun 08 05:46 PM

[wdhalgren:]

Gilead is an expensive version of big pharma. They have no particular technology of interest to any acquirer, so valuation makes buyout highly unlikely. Gilead's HIV franchise is obviously the best in the industry, but the market has long since acknowledged the growth of that franchise by giving Gilead a premium valuation.

So the question is, what drives the stock from here. Unfortunately, the CVTX acquisition doesn't fit the bill. Ranexa is, and always will be a niche drug. Nitrates are dirt cheap and work well for the great majority of patients. The incremental benefit Ranexa affords to a few refractory patients is unlikely to command enough price premium to make a dent in GILD's bottom line, particularly in an increasingly price sensitive environment. The other CVTX drugs aren't big enough to even register for a company with GILD's market cap.

Bottom line, Gilead overpaid for CVTX, and part of the reason they overpaid was Darusentan hopes. Unfortunately, Gilead doesn't have expertise in mass market drugs and will soon understand the vast gulf between HIV and hypertension. With the side effect/efficacy profile seen to date, Darusentan has a 60/40 chance of making it past the FDA, IMO. If approved, it probably won't generate a positive ROI, since it will be competing on a fairly level playing field with several generics. That a marginal 3rd line antihypertensive is even being discussed as a driver for a 40+ billion dollar pharma company is evidence of overvaluation.

Gilead's main advantage has been the belief that management was somehow that much better than the rest of big pharma. The Myogen, CVTX and Corus acquisitions have pretty much obliterated that rationale. It's extremely difficult for any pharma to maintain a premium multiple based on growth through acquisition, the market is too efficient, yet Gilead management has clearly signalled (via acquisitions and stock buybacks) that their internal investment opportunities are insufficient to maintain the stock's premium multiple.

Over the past year, GILD stock has correlated well with, but slightly underperformed, the PPH index. At the same time the stock has been significantly more volatile than that benchmark. Given GILD's valuation premium and the high event risk of their premium pricing model as we enter an extended (forever?) period of global health care price pressures, I think this stock's risk reward is higher than relevant peers and expect that over time its valuation will gradually merge with the big pharma group, probably reaching parity about the time the tenofovir molecule loses patent protection.

Jun 08 07:31 PM