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Gilead Science (GILD) seemed to be on a roll lately, but has been met with a downgrade by the firm Morgan Joseph due to upcoming patent expiration concerns this decade. At the time of writing this, GILD was trading off its 52-week high to just under $48. At these levels, I feel GILD is undervalued as the pipeline is strong and the HIV sales will continue to be significant.

GILD has maintained dominance in the HIV market but, with patents expiring over the next decade, its HIV division is being threatened. Currently, 81% of GILD’s sales are from the HIV division so any threat of losing HIV sales would surely send GILD’s stock down. GILD plans to remedy those concerns with their new HIV drug Quad.

The other week, GILD released favorable data on the Phase II trial for Quad which, if approved, will help GILD maintain dominance for years to come. The results were very positive. Quad is a four-in-one HIV pill that will be exclusively owned by GILD and not shared by any other companies. When compared to Atripla and Ritonavir, it showed efficacy was just as strong even though it is a once-a-day treatment. Safety concerns were better than expected when compared to Atripla and in a smaller study were elevated compared to Ritonavir.

However, upon deeper investigation, the big concern was how the liver toxicity would compare against Ritonavir. The study results showed no substantial difference between the two. That is pertinent information to know. Is GILD only going to focus on the HIV market though?

Last week, the FDA approved GILD’s drug Cayston, which treats lung infections in patients who suffer from cystic-fibrosis. Cayston, although being in a smaller market than HIV drug treatments, will help bring diversification to GILD’s revenue streams. Novartis’s (NVS) drug TOBI is the only current competitor to Cayston.

TOBI raked in $300 million in 2009 sales while having a very inconvenient dosage process. Cayston is much more simplistic and convenient to take (2-3 minutes per dose versus 15 minutes per dose with TOBI). Not only will Cayston be a better choice because of the inconvenience of taking TOBI, but patients who are not receptive to TOBI will now have Cayston as an alternative. I am expecting that Cayston will not only take market share from TOBI but will be able to surpass $300 million in sales a year.

With Quad looking well on its way to obtaining FDA approval and Cayston recently approved, patent expiration concerns should be alleviated. The current path projects Quad to be releasing data in 2012 for Phase III and I am expecting it to be promising based on the recent positive results. The future is looking brighter for GILD and the stock should start reflecting it sooner rather than later.

GILD is loved by institutions, which hold over 90% of the current O/S. GILD recently approved a $1 million buyback which will last through January 2011 and, in my opinion, makes GILD a safer pick to invest in. With a low beta around .39, GILD is a solid stock to help balance my portfolio. A low beta stock helps diversify from the high volatility I expose myself to with my other holdings. The day-to-day market volatility will impact GILD less than most stocks. At a forward multiple of only 11, GILD is undervalued.

Short-term, I expect GILD to move towards the mid $50s. At this time, I will look to reevaluate my thesis and take profits or exit my position entirely for a nice gain.

As always, do your own homework and see if you agree with me. Thanks for reading. Good luck out there.

Disclosure: Author holds a long position in GILD but positions can change at any time.

Source: Gilead Science: Dominance in the HIV Market