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Summary

  • The Hepatitis C market will be larger and of a greater duration than forecast.
  • Gilead will remain the leader in Hepatitis C pharmacotherapy.
  • Gilead is given little credit for its pipeline.

I have been recommending Gilead (NASDAQ:GILD) for the past 3 years, and for the past 2 years my price target has been $140. Below, I shall discuss the company's current earnings stream, largely driven by Hepatitis C, as well as a few pipeline products.

For years, in the United States, 100,000 Hepatitis C patients were treated annually with therapies whose success rate ranged between 40-70%, had significant side effects, and cost up to $85,000. In 2013, awaiting the introduction of newer, better therapies from Gilead and Johnson & Johnson (NYSE:JNJ), only about 50,000 patients were treated. Therefore, with the approvals of Gilead's Sovaldi and JNJ's Olysio, there was pent-up demand for these drugs. In 2014, I estimate that about 140,000 patients will be treated in the U.S., and in 2015, with the availability of Gilead's Fixed-Dose Combination of Sovaldi and ledipasvir, which greatly reduces the need for concomitant interferon or ribavirin, I project that treated patients will rise to 210,000. Furthermore, I believe that this only scratches the surface of the estimated 3.5 million people with Hepatitis C. In 2015, Gilead will additionally benefit from approval in other countries, including Japan. Overall, I believe that there are about 19 million "U.S. dollar equivalent" patients worldwide.

In the U.S., suggested screening of those born between 1945-65 could result in another 800,000 people being diagnosed with Hepatitis C. I therefore expect that an increasing number of people will be treated in the U.S. annually through at least 2017. Capacity constraints should not be relevant as hepatologists and gastrointestinal physicians will be joined by infectious disease and primary care doctors. Also, the lessened use of interferon and ribavirin, as well as the shorter duration of therapy, will mean that each patient will require less staff time than previously.

In the next few weeks, Gilead should also be announcing top line Phase 3 data of its anti-viral tenofavir alafenamide (TAF). TAF should prove to be superior to Viread (tenofavir disoproxil fumarate) with respect to renal and bone mineralization side effects. This is important due to Viread's upcoming patent expiry at the end of 2017.

Overall, I forecast Gilead to achieve EPS of $8.25 and $10.75 in 2014 and 2015, respectively. Beyond this timeframe, I project Gilead's forward growth rate at 18%. This will be driven by continued growth in the Hepatitis C market, third generation Hepatitis C drugs, recently approved idelalisib, and pipeline efforts in NASH (non-alcoholic steatohepatitis) and nephrology.

Regarding Hepatitis C, concerns have been raised regarding the market size, competitors and patent vulnerability. I believe that it is now understood that this market is larger in both size and duration than previously thought. From a competitive standpoint, I have maintained that only Merck has a reasonable drug regimen, though Gilead has a substantial head start and will have successfully treated a few hundred thousand patients before Merck's first entry, which will not include an NS5B inhibitor (the backbone). While I do not expect significant price competition, that remains to be seen. I shall point out that I believe Gilead's FDC will be priced less than Sovaldi on a "therapy basis" (and therefore much less than Sovaldi plus Olysio). As for the patent concern, Gilead's recent victory over Roche should give investors comfort.

In performing my analysis, I rely on PEG ratios, and I give little consideration to Price-to-Sales or overall market capitalization, especially if I am confident that operating margins can be maintained. Using my 2015 EPS estimate of $10.75, Gilead's stock is currently trading at a P/E of 10x, or 55% of projected forward growth rate. I view this valuation as being very attractive. I note that were the stock to trade at 80% of forecast growth rate, the price would then be $154.

Source: Gilead: Earnings Forecast Justifies $140 Price Target