Gilead Is Set To Grow

May. 5.14 | About: Gilead Sciences, (GILD)

Summary

The market opportunity for Sovaldi is huge and the drug has barely scratched the surface of the target market.

The strong pipeline and the launch of two new drugs will allow the company to continue revenue growth.

The growth in the fundamentals of the company justify the rise in the stock price over the last twelve months.

Gilead Sciences (NASDAQ:GILD) has seen some robust growth recently, especially the launch of Sovaldi, the company's newest Hepatitis C drug, has surprised everyone. The drug has surpassed the most lofty expectations and the revenues from Sovaldi continue to grow. Rapid growth in revenues will continue to strengthen the fundamentals of the company and make it an extremely attractive long-term investment. We believe there is still room for the company to grow as Sovaldi has just barely scratched the surface of the target market, and there some drugs in the company's pipeline that can prove to be massive success.

How far will Sovaldi take the company?

Gilead has gained a lot from its new drug Sovaldi. The new drug was responsible for over $2.2 billion in first-quarter revenues which resulted in substantial profits for the company. The success of the drug has been astonishing and it might cross the $10 billion in annual sales if the sales continue to grow at the current rate. There is a major market opportunity for the company as the drug is currently used by a small fraction of the 130 million people affected worldwide - there are about 3 million Americans affected by the virus which can be treated by Sovaldi, and currently, only 30,000 Americans have started using the drug. The company charges $84,000 for a 12-week course of Sovaldi - there has been criticism about the pricing of the drug as many believe that patients might not be able to pay for the treatment.

In order to develop Sovaldi, the company had to invest close to $11 billion to develop the drug. The heavy research and development costs along with the massive market opportunity has played a vital role in the company charging such high price for the drug. The patents for Sovaldi are valid till 2024 - it is a considerable period for the company to exploit the potential of the drug.

Better Product Pipeline

The Company currently has 22 drugs in its pipeline. Two of these are submitted for the approval process with the FDA. These drugs treat HIV/AIDS and, if approved, will hit the market in about a year's time. Tybost is a pharmacokinetic enhancer responsible for boosting blood levels of some key HIV medicines. The boosting agent, Tybost, boosts the blood levels of atazanavir and darunavir by suppressing the production of CYP3A, an enzyme which metabolizes these two drugs. Thus, once-daily dose of Tybost can help the patients to have a longer effect of the core HIV drugs mentioned above. E.U. approval came through in 2013 and Gilead awaits U.S. approval after which the drug will be launched in the market. We expects the company to substantially grow its revenues as Tybost hits the market.

The other important HIV/AIDS drug in the company pipeline is Vitekta. It is an integrase inhibitor that fights HIV reproduction by blocking it from mixing into genetic material of cells. Vitekta is not only a newer form of drug to cure HIV, it will also give hope to the patients which have failed in the previous ways of therapy.

There is a huge number of HIV patients in the world and are rapidly increasing. According to global statistics of Aid.org, 33.4 million people are currently living with this virus. In 2008, 2 million people died because of the virus and another 2.7 million new people were affected in the same year. This gives a hint of the severity of the virus and its deadly growth. Both being the key drugs to HIV patients, Gilead has a huge market of 33.4 million to sell its new product.

Impact of Sovaldi and Other Drugs on the Fundamentals of the Company

Sovaldi alone added $2.27 billion to the total first-quarter revenues of the company, resulting in over 100% rise in year-over-year revenues. On per share basis, the quarterly revenue from the drug stands at $1.48. If the drug goes on to reach $10 billion in sales then we will see Sovaldi accounting for $5.95 in per share revenue. If we take into account the other drugs and growth in the sales, the per share total sales will be around $8 for the company. At the moment, Gilead's price-to-sales ratio is 11.8, higher than the industry average of 8.7. However, as massive growth in sales is expected due to the success of Sovaldi; we can assume that this metric will come down and it will be in line with the industry average over the next few months.

Gilead's full year outlook for the current year looks conservative as the sales from Sovaldi alone will allow the company to cross last year's total sales of over $11 billion. Furthermore, the sales of Sovaldi also add to the gross margin of the company - for every $1 billion sales of Sovaldi; the gross margin of the company goes up by 0.75-1% -- so, if the company reports $10 billion in sales from Sovaldi then we will see gross margin improve by 7.5-10% for the full year. Furthermore, the approval and the launch of above mentioned two HIV drugs will further enhance the revenues of the company. The cash position of the company is extremely strong with over $6 billion in cash and cash equivalents and growing sales will further enhance the cash position.

One of the biggest risk for the company can be the criticism of pricing for Sovaldi - there are concerns that patients will have trouble paying the cost of the treatment. As a result, patients might turn to the cheaper options. However, one of the biggest threats to Sovaldi is the launch of AbbVie's (NYSE:ABBV) hepatitis drug. AbbVie has also seen very good results for its Hepatitis C drugs and the company will be looking to replace Humira revenues from this segment as Humira will lose intellectual property and face competition from generic manufacturers.

Conclusion

The growth for Gilead is visible as the target market for Sovaldi is huge and the drug has not yet penetrated the market. Furthermore, the pipeline of the company is extremely impressive and above mentioned two drugs will add to the revenue growth shown by Sovaldi. Over the next few quarters, we expect substantial growth in the total revenues of the company. The stock is up over 54% during the last twelve months - we believe the growth in fundamentals and the future growth opportunity justifies the rise in the stock price, and Gilead is still a good long-term investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.