Eye on Gilead Sciences

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 |  About: Gilead Sciences, Inc. (GILD)
by: Hans Wagner

Gilead Sciences (NASDAQ:GILD) is a biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases. They are a multinational company, with revenues from ten approved products and marketing operations in twelve countries.

Their research is primarily focused on anti-infectives. Currently, they market Truvada®, Viread®, and Emtriva® for the treatment of HIV infection; Hepsera® for the treatment of chronic hepatitis B; AmBisome® liposome for injection for the treatment of fungal infection; and Vistide® for the treatment of cytomegalovirus [CMV] retinitis and DaunoXome®(liposomal daunorubicin injection) for the treatment of advanced HIV-related Kaposi’s sarcoma. In July 2006, they also began marketing Atripla™, a single tablet regimen of our Truvada and Bristol-Myers Squibb Company’s (NYSE:BMY) Sustiva®, with their joint venture partner, BMS. F. Hoffmann-La Roche Ltd (Roche) currently markets Tamiflu® for the treatment and prevention of influenza under a royalty-paying development and license agreement with the company. OSI Pharmaceuticals, Inc. (OSIP) markets Macugen® in the United States and Europe for the treatment of neovascular age-related macular degeneration under a royalty-paying collaborative agreement with Gilead.

3rd Quarter Results

For the third quarter of 2006 the company experienced strong net product sales of $670.1 million including HIV product sales (Truvada, Viread, Atripla and Emtriva) of $557.3 million. A 53% increase in HIV product sales in the third quarter of 2006 over the third quarter of 2005 served as a key driver in increasing total product sales by 43% over the comparable period in 2005. HIV product sales were up 17% sequentially from the second quarter of 2006, mainly due to the continued growth of Truvada in Europe and the launch of Atripla in the United States in July 2006. This increase was offset by a decrease in sales of Viread in the third quarter of 2006 from the third quarter of 2005 due primarily to patients switching from a Viread-containing regimen to one containing Truvada and Atripla in countries where Truvada and Atripla are available.

AmBisome product sales in the third quarter of 2006 increased by one percent compared to the third quarter of 2005. Hepsera product sales for the third quarter of 2006 increased 18% from the third quarter of 2005 driven primarily by sales volume growth in Europe. On the collaborative front, the company recognized $76.2 million in royalty revenue of which $62.7 million related to royalties received from second quarter 2006 sales of Tamiflu by Roche. Tamiflu royalties increased from comparable periods in 2005 due to strong sales of Tamiflu by Roche as well as the elimination of the contractual cost of goods adjustment that was implemented in 2005.

In addition, during the quarter ended September 30, 2006, the company received a $5.0 million milestone payment from GlaxoSmithKline (NYSE:GSK), associated with achieving four consecutive quarters of Hepsera gross sales exceeding $75.0 million in GSK territories. This amount has been recorded as deferred revenue to be amortized into contract revenue over the life of their manufacturing supply agreement with GSK.

Net loss for the third quarter of 2006 was $52.2 million, or $(0.11) per diluted share, which included a charge of $355.6 million for purchased in-process research and development [IPR&D] incurred in connection with the acquisition of Corus Pharma, Inc. (Corus) in August 2006 and after-tax stock-based compensation expense of $25.6 million reflecting the impact of expensing options. Excluding the impact of the IPR&D charge, non-GAAP net income for the third quarter of 2006 was $303.4 million, or $0.64 per diluted share. Net income for the third quarter of 2005 was $179.2 million, or $0.38 per diluted share.

Key Drivers

Gilead is experiencing rapid growth in its portfolio of HIV drugs as shown in the chart below. This growth in HIV drugs is likely to continue through 2007. The question is what will be the impact from the company’s acquisition of Myogen. So far we know they have applied to the FDA to begin marketing ambrisentan for the treatment of pulmonary arterial hypertension. We should learn more at their 4th quarter earnings release and conference call on January 31, 2007.

GILD chart 1

Growth continues to be balanced between the United States and the rest of the world. This balance bodes well for the company.

GILD chart 2

Growth of new products will eventually drive new sales for Gilead. At this time we do not know the success, if any, of these new products. Such is the nature of biotechnology companies.

Moving into New Therapeutic Areas

Gillead is moving into new therapeutic areas. On August 11, 2006, they completed the acquisition of Corus Pharma, Inc. (Corus), a privately held development stage biopharmaceutical company focused on the development and commercialization of novel drugs for respiratory and infectious diseases. The aggregate purchase price was approximately $414.7 million, including cash paid of $363.6 million for all of Corus’s outstanding stock, a holdback amount of $36.5 million payable to Corus shareholders if there are no claims or disputes brought forth by Gilead one year after the closing of the merger, the fair value of vested stock options assumed of $7.4 million, estimated direct transaction costs of $3.2 million and employee related costs of $4.0 million. The company also recorded a purchased in-process research and development [IPR&D] expense of $355.6 million during the quarter ended September 30, 2006.

In October 2006, Gilead agreed to acquire Myogen in a cash transaction of approximately $2.5 billion. Myogen is a publicly held biopharmaceutical company based in Westminster, Colorado, focused on the discovery, development and commercialization of small molecule therapeutics for the treatment of cardiovascular disorders. On November 17, 2006 Gilead completed the acquisition of Myogen. The company expects to record a material charge to earnings related to this acquisition associated with purchased IPR&D in the 4th quarter. Details will be available with their earning release on January 31. 2007.

In September 2006, Gilead established a three-way joint venture, Bristol-Myers Squibb, Gilead Sciences and Merck Sharp & Dohme Limited, a limited company incorporated in Ireland. The joint venture will be the holder of the marketing authorization for Atripla. The joint venture filed for marketing authorization with the European Medicines Agency in October 2006, under the centralized licensing procedure. When the marketing authorization application is finalized and approved, the joint venture will hold one marketing authorization in all member states of the European Union. Discussions among the three companies regarding agreements for manufacturing, commercialization and distribution of Atripla in the European Union are ongoing.

In April 2006, the company issued $1.30 billion principal amount of convertible senior notes and concurrently repurchased $544.9 million of common stock under the stock repurchase program. These transactions, along with $738.6 million of operating cash flows generated during the first nine months of 2006, partially offset by $356.2 million of net cash paid for the Corus acquisition and $161.0 million of payments made towards the principal on their term loan, contributed to the increase in cash, cash equivalents and marketable securities of $893.4 million from December 31, 2005. This cash, cash equivalents and marketable securities will be used for licensing opportunities and acquisitions such as the $2.5 billion Myogen.

Status of New Drug Developments

On December 18, 2006 Gilead submitted a New Drug Application [NDA] for marketing approval of ambrisentan for the treatment of pulmonary arterial hypertension. The application is supported by data from two Phase III clinical studies and three Phase II studies. The rights to ambrisentan were part of the acquisition of Myogen. GlaxoSmithKline holds the rights to commercialize ambrisentan outside the United States.

On December 19, 2006 Gilead announced that preliminary results from the Phase III study of aztreonam lysine for inhalation patients with Cystic Fibrosis, met its primary efficacy endpoint. Complete study results will be submitted for presentation at an upcoming scientific meeting. Data from this study has not been reviewed by the FDA. Aztreonam lysine is an investigational compound and has not yet been determined safe or efficacious in humans.

Other Considerations

On December 7, 2006 Gilead announced it had received a subpoena from the United States Attorney's Office in San Francisco requesting documents regarding its marketing and medical education programs for Truvada®, Viread® and Emtriva®. The company expects to fully comply and cooperate with the request. At this point there is no further information as to the issues this subpoena is seeking to address.

The integration of Myogen will cause Gilead to absorb substantial purchased in-process research and development [IPR&D], as well as consume cash and investigable securities. At this time we do not know the potential sales from products from this acquisition. We should learn more with their earnings release and conference call scheduled for January 31, 2007.

Conclusions

Gilead Sciences should continue to experience good growth and has potential new sales from its acquisitions. The value and expected growth of these new products will become more clear over time, starting with their 4th quarter earnings release and conference call.

Investing in drug and biotechnology companies should be for aggressive investors seeking growth opportunities, as they typically have high valuations (P/E is 42) which can cause the price of the shares to fall quickly with any bad news. The rapidly growing portfolio of HIV drugs should continue to generate good growth in revenues for the company during 2007. However, it remains unclear how many more years this growth can continue and the impact new product sales will have on the company’s performance. At this time I would be a buyer of shares of GILD on dips to key support areas. And as always, keep the appropriate trailing stops in place to protect capital and profits once they develop.

Disclosure: Author owns shares of GILD.