Gilead Sciences (GILD) reported a good Q2 on July 25, 2013, with revenue up 9% sequentially and 15% y/y. But at a stock price of $62.02 (closing, July 29, 2013), implying a trailing P/E of 41.1, bets are in that future revenue and profit growth will exceed 15% per year. Market capitalization today was $94.6 billion.
The high P/E is largely in anticipation of new Gilead therapies for Hepatitis C, a relatively common disease that may hide undetected in the liver for long periods before doing damage. When detected it is recommended that it be eradicated, if possible. Currently available therapies are less than optimal because they are difficult to administer (requiring injections over a long period of time), often have side effects that deter patients from completing the regimen, and often fail to cure even the patients that complete the course. To some extent the success rates depend on the subtype (genotype) of the virus being treated.
Gilead's lead candidate for Hepatitis C is sofosbuvir. Applications for marketing authorization are in with the FDA and with agencies in Europe, Canada, Turkey, Switzerland and Australia. In the USA the FDA should decide by the PDUFA date of December 8, 2013. Ahead of that is an advisory committee hearing on October 25. There have been a number of Phase III trials with sofosbuvir alone and in combination with older therapies for various genotypes. Details can be found in Gilead press releases, including: Gilead Announces FDA Priority Review Designation for Sofosbuvir and Sofosbuvir for Hepatitis C Meets Primary Endpoint in Fourth Pivotal Phase 3 Study.
But what patients and doctors really want is a single-pill regimen that will cure close to all Hepatitis C patients in a reasonable period of time. If that can be brought to market then there will be no need for patients to pay $400 or so to identify their genotype before starting treatment, nor for additives like interferon and ribavirin. Scientists at Gilead believe this is achievable by combining Sofosbuvir and one or more other agents in a single pill. Other drugs are already being tested, with the next up being ledipasvir. A Phase 3 study (ION-1) of sofosbuvir plus ledipasvir for genotype 1with and without ribavirin passed the predefined threshold for effectiveness in the first 200 patients, so the remaining 600 patients are being enrolled. ION-2 was fully enrolled in March, with a similar protocol except the patients are all treatment-experienced, which is to say the current standard therapies failed to cure them.
In addition Gilead has 4 candidates in earlier-stage trials that could become single HCV (hepatitis C virus) agents or parts of multi-agent therapies. If Gilead cannot find a suitable combination, it might also be able to license a therapy from another company, though that does not appear to be a likely necessity.
How much is a good Hepatitis C therapy worth? The range of estimates for that is the main source of uncertainty in predicting where Gilead revenues and earnings could be in 2015. There are rivals (including interferon + ribavirin), and there could be more rivals approved by the FDA in the future. Pricing to some extent reflects the safety and efficacy of rivals and their pricing.
On the July 25 conference call management talked about some of the parameters around treating patients if sofosbuvir or combination therapies are approved. There are two differing backlogs. The most immediate pool is patients who know they have HCV and for whom prior therapies failed. The bigger group are those who don't even know they have HCV. With better treatments available, it is likely screening for HCV would become more systematic, but it would take time to establish such a regime. Management gave the number of 150,000 per year, but it was clear that is a broad estimate.
Unlike Gilead's HIV franchise, patients would not be in long term care. They would take the therapy once, and it would either succeed or fail.
So then it comes down to pricing. Pick a price point, multiply by 150,000 per year, take out cost of goods sold (probably minimal) and operating costs (more substantial) and you have your increase in earnings. I have not heard any price point mentioned by Gilead. Current triple therapy (Victrelis or Incivek; plus interferon and ribavirin) for patient with advanced disease run to over $50,000, but that involves up to 48 weeks of therapy. The Gilead therapy would be shorter, probably either 12 or 24 weeks. It is not likely to be under $10,000 per patient (totally my own guess; it could be way off, and I tend to make guesses that are easy to multiply out). That would be $1.5 billion per year if Gilead takes the entire market.
Going further out on a limb, since I am just making an educated guess, I would say it could add $200 million per quarter to net income. I know there will be bulls out there with far higher estimates, but I like to estimate conservative until proven otherwise. When the price is set after FDA approval I will update my model.
Unless you estimate higher profits for sofosbuvir, it seems like most of the Hepatitis C story has been built into the stock price in the past year. If you argue for $20,000 or more per patient, then new revenues are not priced in. Remember, the 52 week low was $26.75 back on August 1, 2012, so the stock has come a long way. But there are other factors to consider. New revenues are also likely to be coming in from Idelalisib for Chronic Lymphocytic Lymphoma and indolent non-Hodgkin's Lymphona and from Ranolazine for cardiovascular indications. A number of other therapies and indications have reached or completed Phase 2.
I am holding onto my GILD for now because I believe in the long run the company will be more valuable. Gilead is beginning to make serious money outside its HIV franchise, and has a strong pipeline. Given past experience, it is not hard to project that Gilead will continue to add to its pipeline. In the short run its existing therapies, on the whole, will continue to ramp revenue. Here's where they were in Q2:
Revenues by product ($ millions):
There are risks, of course. Gilead's candidates may not become the leading Hep C therapies. R&D expenses on pipeline products may not pay off. New HIV therapies or even an HIV vaccine could someday undercut Gilead's HIV franchise. Patents, of course, will expire over time.
Finally, since Gilead now has a high P/E ratio (unlike as recently as 12 months ago), I would like to see stock buy backs minimized and a dividend instituted. Cash flow in Q2 was $950 million. Due to acquisitions long term debt at $6.3 billion exceeds cash at $3 billion. Stock buy backs have been suspended because of debt. When debt target goals are reached a dividend would help make the value of GILD more obvious in comparison to bond yields.