Gilead Will Continue Its Rise

| About: Gilead Sciences, (GILD)


Increased screening in the domestic market will likely result in an increase in the target market for Sovaldi.

Sales growth from the domestic as well as the global markets will remain strong for the company, due to the massive size of the target market.

Developing economies will be important for the sales growth, as the number patients with HCV infection in these countries is very high.

The rapid growth in Sovaldi revenues over the last quarter has triggered a solid trend in the stock price of Gilead Sciences (NASDAQ:GILD) - the stock is up about 25% since it had its last dip at the start of April. The target market size of the drug makes the prospect of exponential growth in revenues possible for the company over the next few quarters. Our fellow SA authors have shed light on the domestic hepatitis C market, as well as the quarterly performance of the company. We will mainly focus on the threat of pricing and the global prospects of the drug.

There has been a lot of pressure on the company to justify the price for Sovaldi, since the treatment substantially increases some government-backed medical costs and it can result in increased cost of as much as $6.5 billion. Despite the pressure in the domestic market, we believe the opportunity from the global markets will continue to drive growth for the company. Japan has more than 2 million HCV patients, where the company is planning to launch its drug.

The Issue of Pricing Might not Impact Sales

As the drug companies are focusing to treat previously impossible-to-cure diseases, such as cancer and auto-immune syndromes, they tend to charge a higher price in order to recoup the heavy R&D costs. The increased cost burden endured by the insurance companies and government has made drug prices an increasingly hot issue over the past few months. The drug manufacturers have now been called to justify and negotiate the drug prices. Moreover, generic and competitive drug manufacturers are also encouraged to remove the monopolistic pricing environment in the HCV market. Gilead has been facing such disturbance since the launch of its flagship product, Sovaldi, due to its price tag of $84,000 for complete treatment.

Recently, CMS announced that Medicare, a social healthcare program for about 50 million Americans, has started covering the costs of HCV screening. The coverage includes the cost of one screening every year for adults born between 1945 and 1965, and multiple screenings for individuals with illegal drug usage and blood transfusion history before 1992. This will benefit Gilead, as the announcement will lead to increased Sovaldi prescriptions resulting from increased HCV patients from regular screenings. Moreover, there are about 3 million HCV patients in the U.S., and the company reported to prescribe only 30,000 individuals in the first quarter. The increased screenings will discover more patients, which will substantially increase the Sovaldi target market in the future.

Despite the debate about pricing, the analysts are very confident of Sovaldi sales in the coming quarters. Analysts from Citigroup (NYSE:C) have increased their Sovaldi sales estimates to $9.5 billion in the current year, and ranked Gilead in their top Long picks for 2014. This is due to the company's dominant position in the lucrative HCV market, supported by leading HIV and oncology franchise.

The barriers to entry in this market are expensive, but the attractive market and the prospect of high margins have attracted competition to the segment - Merck (NYSE:MRK) and AbbVie (NYSE:ABBV) are set to join the competition by the end of 2014. Recently, Merck has paid $3.85 billion, the highest-ever premium in a healthcare deal, to acquire Idenix Pharmaceuticals in order to enter the hepatitis C market. Moreover, AbbVie has filed a three-drug combination therapy for FDA approval, which achieved competitive results in its Phase III testing.

Future Growth from Overseas will Remain Strong

As mentioned above, sales are going to increase for Sovaldi, due to massive target market globally. Europe has shown a stern stance on the product; however, the company is negotiating on price and reimbursements in discussions with the European Union, which will be resolved shortly. The company is also targeting Asian markets, including Japan, India, Egypt and Pakistan. There are over two million people infected with HCV in Japan, and the company is expected to reach the market in 2015.

Even if the price pressure could reduce the $84,000 price tag of Sovaldi in the U.S., Gilead has strong growth opportunities across the borders. The company has planned to license Sovaldi to numerous Indian generic pharmaceutical manufacturers, which will enable Gilead to sell lower-priced copies of the drug. This will allow the company to charge substantial proprietary patent charges from the generic manufacturers. Gilead also signed an agreement with a pharmaceutical distributor in Pakistan; Ferozsons, which will market and distribute its medicines for the treatment of HCV (Sovaldi), HIV and chronic hepatitis B [HBV] infection in Pakistan. There are an estimated 18 million people infected with HBV and HCV in Pakistan, including 7 million infected with HBV and 11 million with HCV. Moreover, Egypt has a massive market for Sovaldi, with 12 million patients with HCV infection. The cause of this massive number of patients is the use of contaminated needles in a campaign to eliminate schistosomiasis (disease caused by parasitic worms) in the 1970s. Gilead offered Egypt to supply Sovaldi at a 99% discount to the U.S. price, which will bring its cost to $900 for a 12-week course of treatment.


Despite the debate on the pricing of the product and the expected competition from AbbVie, we believe the sales growth for Gilead will continue both from the domestic and the global markets. The opportunity is massive, as the target market is huge. Furthermore, AbbVie does not intend to start a price competition, which should not put pricing pressure on Gilead. As a result, the margins should remain high for the company. We believe Gilead will continue to outperform on the back of solid revenue growth from the domestic and global markets.

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