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GlaxoSmithKline (GSK) recently received FDA approval for its HIV drug. On August 12, 2013, ViiV Healthcare, a joint venture between GlaxoSmithKline, Pfizer (PFE), and Shionogi received approval for its first HIV drug "Tivicay". In this venture, GlaxoSmithKline holds the largest equity stake of 76.5%, Pfizer holds 13.5% stake, and Shionogi holds the remaining portion. These companies have transferred their HIV assets to ViiV and are now ranked second after Gilead Sciences (GILD).

We expect that after this approval of Tivicay, GlaxoSmithKline has a good chance of capturing Gilead's HIV market. Gilead has already captured around 50% of the HIV market share with its early lead. As per EvaluatePharma, a drug research firm, the HIV drug market is expected to grow from $17.5 billion in 2012 to its highest level of $20.58 billion by 2016 and will stabilize at around $18 billion in 2018.

Gilead recently received FDA approval for its HIV drug, "Stribild". It is a one pill once-a-day dose used for complete HIV-1 treatment. This drug, with its other three HIV drugs: Truvada, Complera, Atripla, are expected to grow at a CAGR of 6.65% from 2012 to 2016, reaching $9.25 billion by 2016. The Company has the largest HIV market share, and its recently approved HIV drug Stribild enables it to grow in the future. However, the FDA rejected its HIV drug "elvitegravir" as the standalone HIV medication this year, which may be a matter of concern for the company. Overall, we are expecting its four drugs will drive its earnings further and will generate a positive sign for the company among investors.

Please also read: "Can Gilead Maintain Supremacy Against GlaxoSmithKline"

We are optimistic about Tivicay, as in the trial phases it showed positive results in blocking the HIV virus in 88% of patients after 48 weeks of successful dosing compared to Gilead's drug Atripla's 84% success rate. Gilead's Stribild performs similarly with a success rate of 88%-90%. ViiV is very optimistic about the drug's ability to suppress the virus. In trial phase, Tivicay marked key advancement towards the regulatory front, and we expect it will give intense competition to Gilead due to the rejection of its HIV drug, elvitegravir.

Moving ahead to pricing, Tivicay is priced cheaper than other HIV drugs; it cost around $1,175 per month compared to Gilead's Stribild, which is priced at $2,375 per month. The company has optimally priced Tivicay, and it expects to serve the majority of HIV patients, who have found other available drugs costly. We expect there is a good opportunity for the company to tap this market with its new drug.

Tivicay's strong performance in the trial phase combined with optimum pricing and increase in HIV patients provides great potential for the company. Further, GlaxoSmithKline's strong brand name will enable it to promote this drug easily in the market. It is expected that the average market for Tivicay should reach around $900 million by 2017 and has peak sales potential of $5 billion.

However, we also expect that Tivicay will take time to capture the HIV market since it was approved recently. So, this will not affect Gilead's earning capabilities in the short run. However, it is expected that Tivicay will be able to capture some of its market share in the future due to its low price and the efficiency it showed in trial phase.

On other hand, when we calculate the expected revenue from Tivicay sales for Pfizer, which is holding only 13.5% in ViiV, we don't expect this to drive its earnings significantly. Pfizer has an average revenue earning capacity of nearly $60 billion and $100 million to $125 million will not affect it much. However, after reporting year-over-year loss of 7%, Pfizer raised its EPS guidance from $1.44-$1.59 to $3.07-$3.22, backed by its share repurchase plan. It recently raised the repurchase authorization of $10 billion, which is additional to current $3.1 billion authorization. After the announcement of this additional repurchase plan, its stock priced jumped 1.4%, and in the last year, the stock has given a return of 25% to its investors. We expect that by raising its share repurchase authorization; the company may be able to boost its investors' interest and confidence further.

Fundamentals views

Ratios/Company

GlaxoSmithKline

Pfizer

Gilead

Sector average

Dividend Yield

4.60%

3.40%

-

2.99%

ROE

55.50%

14.04%

31.01%

18.57%

Trailing PE

19.36

7.83

33.73

21.96

Forward PE

13.08

12.27

20.09

20.00

PEG

3.60

3.92

1.12

-

Price-to-sale, or PSR

2.94

3.29

9.04

-

Analyzing the above metrics, GlaxoSmithKline looks attractive in terms of a dividend yield that is higher than the other two companies as well as the sector average. Its trailing price-to-earning, or PE, is 19.36 and its forward PE is 13.08. This combined with return on equity, or ROE, which is significantly higher when compared to Pfizer and Gilead, represents GlaxoSmithKline's higher growth potential for its future earnings.

GlaxoSmithKline is trading at PSR of 2.94, which is again relatively less than its peers. The lower PSR shows the stock price is trading in line with the company's sales. Its PEG ratio is in-line with other drug manufacturers, but it is higher than Gilead's PEG of 1.12. A lower PEG depicts the high grow potential for the company. With a market cap of $186.76 billion, Pfizer is lagging behind among the three companies, but it has certain other factors that will boost investors' confidence.

Gilead Sciences has ROE of 31.01%, which is better than the sector's average of 18.57%. We expect that the company has the ability to generate higher profits for its shareholders. The company has many factors leading us to believe its stock price will continue to rise. These factors include its forward PE of 20.09 is much lower than its trailing PE, it has a PEG of 1.12, its new HCV, and its leadership position in the HIV market.

Finally, Pfizer's forward PE of 12.27 and trailing PE of 7.83 represent some slowdown in its forward earnings, and when compared with the other two companies, it looks quite weak. However, by raising its EPS guidance and simultaneously increasing its share repurchase authorization, we expect Pfizer to drive investors' interest. The company repurchases its shares higher than the prevailing current market price of that time, which will result in upsurge movement in the stock and generate higher results for investors.

Conclusion

The ViiV Healthcare venture is proving to be a great value for both GlaxoSmithKline and Pfizer, but higher for GlaxoSmithKline since it has the majority stake in this venture. Further, the valuations at which the company is trading make this stock very lucrative. It expects EPS growth of 3%-4% for this year from $3.53 in 2012. With this, we can anticipate GlaxoSmithKline stock has strong chances of up surging in the coming quarters.

Source: Tivicay: A Blockbuster Opportunity For GlaxoSmithKline And Pfizer?

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.