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Gilead (GILD) is a large cap biotech company with a current market cap of $100 billion and $9.7B in sales in 2012. Its products include 6 anti-viral drugs that target HIV and HBV, which generated 84% of sales for the company. The company will expand its drug pipeline to HCV and oncology in the future, due to several acquisitions over the past 4 years. These new drugs will be the driving force behind the revenue and earnings growth for Gilead in the next 10 years.

This is Part 1 of a stock review on Gilead. With GILD currently trading at $67.5 after a significant run in recent months, the question is: is there still an upside for this stock? In addition, what will be future revenue growth coming from? To answer these questions, we will analyze GILD's existing products, patent expirations, drug pipelines, and financial projections with the goal of deriving an estimated intrinsic value for this international corporation.

Business overview

Gilead is a large cap biotech company with a current market cap of $100 billion and $9.7B in sales in 2012. Its products include 6 anti-viral drugs that target HIV and HBV, which generated 84% of sales for the company. The company will expand its drug pipeline to HCV and oncology in the future, due to the acquisition of Pharmasset, Calistoga pharmaceutical, Aresco Bioscience, and YM Biosciences over the past 4 years. These new drugs will be the driving force behind the revenue and earnings growth for Gilead in the next 10 years.

Gilead's antiviral drugs include 6 HIV drugs, Atripla, Complera, Stribild, Virad, Emriva, and Truvada, and 1 HBV drug, Hepsera. The anti-viral drugs generated over $8B of sales, or 84% of total revenues in 2012. This represents a 15% increase from 2011.

Notable highlights in 2012 and 2013 include the launch of Stribild, a once-daily tablet regimen containing 4 HIV drugs; the FDA approval of Truvada, the first antiviral drug for the prevention of HIV infection in adults; and NDA filing for approval of all-oral HCV drug combination (sofosbuvir, ledipasvir, ribavirin) (GILD 10K 2012). The FDA advisory committee voted unanimously for the approval of the HCV drug on October 25, 2013; therefore, there is a high probability that the drug will be approved in December 2013.

In its drug pipeline, the company is conducting phase 3 trials on tenofovir alafenamide (TAF), a new reverse transcriptase inhibitor, in treatment-naïve HIV patients. GILD is also conducting several phase 2 and phase 3 clinical trials in oncology. These include Idelalisib (PI3K inhibitor) for the treatment of chronic lymphocytic leukemia (CLL) and indolent non-Hodgkin's lymphoma; Simtuzumab (LOXL2 antibody) for the treatment of myelofibrosis, colorectal cancer and pancreatic cancer; and momelotinib (Jak inhibitor) for the treatment of myelofibrosis. The regulatory events for these new drug candidates are expected to occur in 2015-2016. Their projected revenues will be discussed in this report.

Sales growth from existing products

The key drivers for Gilead's revenues are 6 antiviral drugs that generated combined sales of over $8B, or 84% of total revenues in 2012 (GILD 10K 2012). Through acquisition, the company will expand its pipeline to HCV and oncology. In the near term, the revenues growth will be in the low double-digits. The company will not face generic competition until 2018, when its major product, Viread, faces patent expiration.

We first review existing drugs and ongoing clinical trials for new products. At the end of this section, we will derive revenue projections for the next 5 years based on the sales of existing products and future revenues from new drugs.

Antiviral drugs

Gilead has 3 complete once-daily single tablet drugs for HIV/AIDS, each with a different combination of 3 to 4 antiviral compounds. The first product, Atripla, was approved in 2010, followed by the approvals of Complera/Eviplera in 2011, and Stribild in 2012/2013.

The company also sells Viread and Emtriva, both reverse transcriptase inhibitors, as a single drug that can be combined with other HIV medicines.

Truvada is an oral formulation of Viread and Emtriva, which was approved in 2012 by the FDA for the prevention of HIV infection in adults.

To forecast product sales for the next 5 years, we first review each product's revenue growth rate for the past few years (GILD 10K 2012, GILD 10Q 3Q2013).

Atripla is the company's leading product with annual sales of $3.57B in 2012. However, with the introduction of newer products (Complera and Stribild), its sales growth rate has slowed down from 11% in 2012 to a more modest 2-4% in recent quarters. We project that its revenues will grow at a baseline rate (~2%) from $3.6B in 2013 to $3.9B in 2017.

Truvada is Gilead's second-best selling product with $3.2B sales in 2012. However, its growth rate has also slowed down to ~1% in recent quarters. We also estimate its revenues growth at baseline rate of 2%, with projected revenues between $3.2B in 2013 and $3.5B in 2017.

Viread has $850M sales in 2012 and continues to grow at 8-10% in the last few quarters. We estimate that its revenues will growth at a declining trend from 10% to 6% rate over next few years. Our estimate of Viread's revenues is from $930M in 2013 to $1.27B in 2017.

Complera and Stribild, the newer versions of once-daily single tablet for HIV/AIDS, will command faster growth over the next 5 years. Complera was launched in 2011 and has seen 780% growth in 2012 and 110% growth in recent quarters. It has $340M sales in 2012 and is estimated to generate revenues of $680M in 2013 and $2B in 2017.

Stribild was launched in 2012 with $58M sales in the year. As of 9/30 of 2013, its sales reached $335M, or an 18 fold increase from a year ago (GILD 10Q 3Q2013). We estimate that its revenues will be $680M in 2013, rapidly ascending to $3.2B in 2017, and becoming Gilead's best-selling HIV drug.

The other two antiviral products, Hepsera and Emtriva, have combined sales of $~140M in 2012. With declining sales, both products will have little contribution (~1%) to Gilead's revenues going forward.

Cardiovascular drugs

Gilead has two drugs for cardiovascular indications. Letairis is an oral formulation of an endothelin receptor antagonist (ERA) indicated for the treatment of pulmonary arterial hypertension. It has $410M sales in 2012 with 30% growth rates in recent quarters. We estimate its growth rate to stay at a medium range from 10% to 6% over the next 5 years. Thus, projected revenues are about $450M in 2013 to $600M in 2017.

Ranexa (ranolazine) is an extended-release tablet for the treatment of chronic angina. It has $370M sales in 2012 and had a 15-20% growth rate in recent quarters. We estimate its growth rate to stay at a medium range from 10% to 6% over the next 5 years. Thus, the projected revenues are about $410M in 2013 to $550M in 2017.

The other notable product is AmBisome. It is a proprietary liposomal formulation of amphotericin B, an antifungal agent to treat serious invasive fungal infections caused by various fungal species in adults. While its sales reached $345M in 2012, the drug was on a declining trend in 2013. We estimate that its revenues will continue to decline 6% annually, thus generating $320M in 2013 and $250M in 2017.

The combined revenues of the existing antiviral and cardiovascular drugs are estimated at $10.36B in 2013 and will increase to $15.68B in 2017, which represents an 11% annual growth rate over the next 5 years.

Drug pipeline and new drug applications awaiting FDA action

In this section, we analyze Gilead's drug pipeline and how it will impact its revenues going forward. Gilead has acquired several biotech companies in the last 4 years along with their drug candidates in phases 2 and 3 clinical trials. These drugs, if approved by the regulatory agencies, will provide decent growth to Gilead's revenues in the coming decade.

HCV drug program

Gilead acquired Pharmasset in 2012 and its HCV drug candidate, sofosbuvir. Sofosbuvir is a nucleotide analog that acts to inhibit the replication of HCV. There are multiple phase 2 and 3 clinical trials on this compound, in combination with other HCV medicines.

In the second quarter of 2013, Gilead filed a new drug application (NDA) with the FDA and EMA for the approval of sofosbuvir for the treatment of chronic HCV infections. Supporting data are from phase 3 studies on Sofosbuvir in combination with ribavirin (RBV) or with RBV and pegylated interferon for different HCV genotypes. The FDA has set the target review date for December 8, 2013. Based on the Advisory committee's favorable review (15-0) on October 25th, it is highly likely that the drug will be approved.

Gilead is also conducting phase 3 clinical trials to evaluate an all-oral HCV drug combination that includes sofosbuvir, ledipasvir, and with or without ribavirin. The phase 2 data indicated that more than 95% patients achieved a sustained virologic response (SVR) 4 weeks and 8 weeks after completing therapy (GILD 10K 2012). In Phase 3 data released in November 2013, 85% HCV patients achieved a SVR 12 weeks after treatment (SVR12), which are considered cured of HCV infection (GILD HCV phase 3 results 110213) .

Gilead is likely to file for a NDA for the all-oral HCV drug combination in 2014. We assign a 90% probability that this drug will receive regulatory approval, and project its sales to be $180M in 2014, eventually reaching over $1.2B in 2017.

Oncology program

Gilead acquired Calistoga Pharmaceutical and its drug candidate, Idelalisib, a PI3K delta inhibitor in 2011. The agent has been advanced to several phase 3 trials as a potential treatment for chronic lymphocytic leukemia (CLL) and indolent non-Hodgkin's lymphoma (OTC:INHL).

In September 2013, the company submitted a NDA to the FDA for marketing approval to support the use of Idelalisib, for the treatment of indolent non-Hodgkin's lymphoma for patients with refractory iNHL (non-responsive) to rituximab and to alkylating-agent-containing chemotherapy. The company may also file for a NDA for CLL indication in the near future.

Based on the interim phase 2 data, CLL patients who received idelalisib achieved a complete response rate of 19% and an overall response rate of 97%, with estimated progression-free survival at 24 months of 93% (GILD reported Idelalisib CLL phase 2 results). The phase 2 data on iNHL studies also showed that single-agent treatment with Idelalisib achieved an overall response rate of 54%, with a median duration of response at this interim analysis of 11.9 months (GILD reported Idelalisib iNHL phase 2 results). We assign a 90% probability that the drug will be approved for both cancer indications in 2014. If the drug is approved, we estimate that it will generate $270M revenues in 2015, $480M in 2016, and $870M in 2017.

Gilead has two other new drug candidates currently in phase 2 trials. One is Simtuzumab, a monoclonal antibody targeting the human lysyl oxidase-like-2 (LOXL2) protein. It is being evaluated in various Phase 2 trials for the treatment of myelofibrosis, colorectal cancer and pancreatic cancer. The antibody was acquired through the acquisition of Arresto.

The other drug candidate is momelotinib, which was obtained through acquisition of YM Biosciences. It is a JAK inhibitor being evaluated in Phase 2 clinical trials for the treatment of myelofibrosis. The company is expected to advance the compound to Phase 3 trials later in 2013.

Since these 2 drugs are a few years away from regulatory approval, we do not include them in revenue projection.

Based on our estimation of the probability of approval, the market size, and competition for the above new drugs, we project that these new drugs will generate aggregate revenues of $180M, $600M, $1.1B, and $2.0B from 2014 to 2017, representing an annual growth rate of 124%. These new products will have a more meaningful impact on revenue growth after 2014. It is important to mention that, if approved, some of these drugs have the potential to become blockbuster drugs for Gilead in the future.

In the next section, we will integrate estimated revenues from existing drugs and new drugs into financial analysis and stock valuation.

References

GILD 10K 2012

GILD 10Q 3Q2013

GILD 10Q 2Q2013

GILD HCV phase 3 results 110213

GILD reported Idelalisib CLL phase 2 results-May2013

GILD reported Idelalisib iNHL phase 2 results-June2013

Source: Gilead Five-year Revenue Outlook, Part 1