Invest In Gilead Sciences For Long-Term Hepatitis C Franchise

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 |  About: Gilead Sciences, Inc. (GILD), Includes: BBH, IBB
by: Chris Katje

Shares of Gilead Sciences (NASDAQ:GILD) have seen a monstrous year so far in 2013. This is good news for anyone who has followed my bullish writing on this biotech. However, I believe there are plenty of opportunities to invest in this biotech giant as it shifts from its dominance in HIV treatments to a new blockbuster program in Hepatitis C treatments.

Recently, Gilead's blockbuster Hepatitis C drug sofosbuvir got a recommended 15-0 vote from a FDA advisory committee. The vote was the final step before a FDA approval. The committee gave a 15-0 vote for two separate uses of sofosbuvir. The first vote was for sofosbuvir in combination with ribavirin to treat chronic Hepatitis C genotype 2 and 3 infections. The second vote was for sofosbuvir in combination with pegylated interferon and ribavirin to treat Hepatitis C genotype 1 and 4.

Gilead's drug will now all but certain be approved by the FDA. The current target review date is December 8th. However, with such a successful advisory meeting, I see the drug getting approved by the end of November or early December. The drug is also pending approval in the European Union, Australia, Canada, New Zealand, Switzerland, and Turkey.

The drug is already turning into Gilead's big focus. During a third quarter earnings call, Gilead discussed how it is getting sales and launch teams ready to handle the promotion of this game changing drug. Gilead is also ramping up facilities to be able to manufacture the drug in vast quantities. With peak sales expected at $5 billion, Gilead will want to get product ready as soon as possible to meet the overwhelming demand. The company also offered this, "In closing as I hope you sense it is a very busy yet exciting time at Gilead as we roll out the next stages of commercial growth."

On Saturday, Gilead reported more positive results for several other Hepatitis C related trials using its sofosbuvir drug:

· Phase III Photon - for patients with Hepatitis C co-infected with HIV, using sofosbuvir, 76% of patients saw response in 12 week period.

· Phase II - patients with Hepatitis C who have undergone liver transplantation, patients who took sofosbuvir with ribavirin, results will be presented at The Liver Meeting 2013, being held this week.

· Phase III Valence - sofosbuvir plus ribavirin, 85% of patients saw a response in 12 weeks.

· Phase II Lonestar - sofosbuvir plus ribavirin, 83% of patients saw a response in 12 weeks.

The key to most of these studies is the 12 week study time. If patients receive a positive response in 12 weeks, they are believed to be cured of Hepatitis C. As you can see, Gilead's sofosbuvir is being used in multiple studies and could end up being a huge blockbuster franchise for the company.

The possibility of Gilead's Hepatitis C franchise takes me back to a November 2011 article I wrote titled "Gilead's Pharmasset Purchase Could Help Double Market Cap by 2020". In that article, I highlighted Gilead's $11 billion acquisition of Pharmasset, which was seeing some resistance from Wall Street. The acquisition gave Gilead a hit or miss bet on the success of one drug.

However, as I highlighted then, that drug had several key advantages:

· Taken once daily

· Manageable side effects

· Higher cure rates than current drugs on the market

· Increased treatments with a new drug

· Could combine with a Gilead drug

· Holds worldwide rights, cutting down on royalty payments

At the time of that article, Gilead has a market capitalization of around $30 billion. My article appears to have not been bullish enough, as two years later, Gilead has more than tripled its market capitalization. In fact shares of Gilead are up 257% since that article was published.

As I mentioned then, Gilead's Hepatitis C franchise was seen as a possible $15 to $30 billion value. Investors were essentially getting either the HIV division or possible Hepatitis C franchise for free. That acquisition has now turned into one of the most successful in biotech history, as sofosbuvir is already being hailed as a "game changer".

Another way to invest in Gilead is through two biotech ETFs. Gilead is currently the top holding of two ETF options and offers investors a way to invest in Gilead with the excitement of diversification within the sector.

The iShares Nasdaq Biotech ETF (NASDAQ:IBB) is one way to get exposure to Gilead shares. As of Friday, Gilead held the top position of the ETF making up 9%. This is a slight increase from July when I highlighted the ETF. Not much has changed as the same four stocks (Gilead, Biogen, Amgen, and Celgene) have the largest holdings, just in a different order. The ETF has 119 different stocks represented and offers great exposure to several market capitalization ranges.

Back in July, I recommended buying shares of the ETF. My reasons were the recent merger and acquisition sprees and the upcoming earnings from several large components. In fact, I argued that investors should buy before July 25 as Alexion, Celgene, Biogen, and Gilead all were set to report quarterly earnings. Shares are up a modest 5% since that time and still seem to be worth buying for great exposure to the biotech sector.

The other ETF to buy on a bullish Gilead is the Market Vectors Biotech ETF (NYSEARCA:BBH). Gilead is currently the number one holding with a 14.4% share. Amgen, Celgene, and Biogen are similarly held as the top four positions. This particular ETF holds only 26 biotech stocks and offers huge gain potential if Gilead or others see shares rally. This is the largest weighting for Gilead in any ETF.

Gilead recently reported strong third quarter earnings. The company posted earnings per share of $0.52. Total product sales increased 15% to $2.7 billion for the quarter. Many drugs were new to the market and saw strong launches. Sales in the United States grew 20%. The company also said it should post full year revenue in a range of $10.3 billion to $10.4 billion.

Analysts on Yahoo Finance believe Gilead will earn $1.99 per share for fiscal 2013. This result will come from a 12% increase in revenue to $10.87 billion. In fiscal 2014, earnings per share are expected to hit $3.09 and revenue is expected to hit $13.74. As you can see, strong results are expected in fiscal 2014. Earnings per share are expected to climb 55% after only a modest 2% increase this fiscal year. Revenue is expected to grow 26.4%, up from a strong 12% this year.

The competition in the Hepatitis C market is heating up. Johnson and Johnson (NYSE:JNJ) also has a drug that is likely to be approved by the FDA. In fact there could literally be a race to see who is approved first as the FDA advisory panels were mere days apart. The good news is if Johnson and Johnson beats Gilead to the market, shares may drop and be in prime position for patient investors to snap up. With Hepatitis C being such a widespread disease, there is plenty of room for completion. Sofosbuvir seems to be the winner in the space and will likely see the most uses for the drug in several key areas of study. Remember, with the risk of this new drug comes Gilead's entire HIV portfolio and pipeline to fall back on.

Shares of Gilead Sciences sit just short of 52 week highs. In 2013, shares of Gilead are up 89%. Shares trade with a high valuation and seem poised for a pullback. However, I think shares could spike higher on the actual approval of sofosbuvir. I remain bullish on Gilead and think shares will see a high in the $85 to $90 range by the end of 2014.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GILD, BBH, IBB over 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.