Gilead's New HIV Drug Pipeline: What You Need To Know For 2012

| About: Gilead Sciences, (GILD)

Gilead Sciences (NASDAQ:GILD) has a current portfolio dominated by HIV treatment drugs. More than 70% of its sales come from HIV treatment products. However it also discovers, develops, and commercializes treatments for other infectious and pulmonary diseases. GILD is currently trading at around $37 and has a market capitalization of $28 billion. Its revenue is expected to grow by 10% next year and has healthy 15% earnings per share growth. The projected 5-year growth is in north of 16%.

The stock is currently trading at a price earnings ratio of 10.5 versus the industry average of 15 times. GILD is beating its competitors both in the gross and operating margins. Price/Sales ratio is 3.5, whereas the competitors are trading at a price/sales ratio of above 8. What makes the stock very interesting is its "price earnings to growth" ratio of just 0.6. We expect that the following catalysts will help the stock trade in north of $50:

  • The potential FDA approval of Quad Pill in 2012
  • Potential approval of Truvada as the first ever precautionary drug against HIV
  • Revenue diversification through acquisition of Pharmasset (VRUS).
  • GILD's plan to de-lever to a Debt/EBITDA of 1.5x or lower
  • GILD's attraction as an M&A target.
  • Stock price is not reflecting the potential growth opportunities.

What Is Quad Pill?

Quad Pill is a combination on Gilead's four compounds into once a day pill. It's a combination of two already FDA approved drugs, an experimental drug and an additional boosting agent. We believe that it will be able to get FDA approval in 2012 for the following reasons:

  • Two late-stage trials (study 102 and study 103) evaluating Quad pill have already met the primary endpoint.
  • In December, Gilead announced that its investigational boosting agent met the primary endpoint in a late stage study (study 114)
  • J&J's (NYSE:JNJ) FDA approval was done after 48 weeks of study showed 83% of patients taking the drug had undetectable viral levels. When we compare this with Gilead's latest two Phase 3 clinical trials we see that 88% and 90% of participants successfully achieved and maintained undetectable viral loads (amount of HIV in the blood).

The best industry analysts are also of the view that the company will be able to get FDA approval in 2012 or early 2013 and has the potential to become a Blockbuster drug.

Truvada To Be Used For Hiv Precautionary Treatment

Truvada is currently Gilead's blockbuster drug used for the treatment of HIV infected patients. Gilead filed a supplemental New Drug Application with the FDA on December 16, 2011 seeking approval of Truvada for reducing the risk of the disease occurring through sex in uninfected adults.

Truvada would be the first agent indicated for uninfected individuals to reduce the risk of acquiring HIV through sex, a prevention approach called PrEP. This can be a major development as 50,000 people are infected with HIV virus every year, alone in U.S. Worldwide there are more than 33 million HIV patients.

It may take years for FDA to approve its use as a precautionary measure, but so far the findings are very positive:

  • A study conducted by U.S National Institute of health showed that the subjects who took Truvada reduced the risk of HIV infection by 44% and those who took it consistently cut the risk by 73% vs. those on placebo.
  • Similarly, a study conducted by Centre for Disease Control and Prevention showed those who were taking the drug had 63% lower HIV infections. But an additional study was halted in April where committee determined that "the test would not be able to establish the efficacy of Truvada."

In the CDC study, which was presented at an international AIDS conference in July, those who took Truvada once a day reduced the risk of getting HIV by 73%.

Analysts are expecting that if the approval process goes smooth this supplemental drug alone can add hundreds of millions of dollars of additional revenue. This is definitely something market is not pricing in at this point. Sell-side analysts, on average, have a price target of $48 for GILD.

I believe that at this cheap valuation the stock is a great buy. Investors should take a look before before the market sees more positive news related to Quad Pill or Truvada. If Truvada is approved for precautionary measures the stock will be trading north of $60 as the Street will start revising earnings estimates upwards. Based on this year's market action, investors have an appetite for bio-tech companies with healthy balance sheets and GILD is at the top of the list. Approvals can cause an earning growth in north of 25%. I will not be surprised if the stock doubles in the next few years as it is an industry leader and addresses a very unique market.

Gilead is in the process of getting FDA approval of its highly anticipated Quad pill (for HIV experimental treatment) which is a combination of Gilead's Elvitegravir and another HIV pipeline candidate Cobicistat, its marketed HIV drug Truvada and Reyataz . Gilead filed the NDA for approval of Quad in late October 2011 on the backdrop of positive results in August 2011. Quad combines four HIV medicines into a once-daily, single pill. Elvitegravir is an important component of Gilead's Quad pill. Two late-stage trials (study 102 and study 103) evaluating Quad pill have already met the primary endpoint.

In the first week of December, Gilead announced that its investigational boosting agent cobicistat met the primary endpoint in a late stage study (study 114) comparing cobicistat−boosted Reyataz plus Truvada with ritonavir−boosted Reyataz plus Truvada.

Since elvitegravir and cobicistat are key components of Quad, positive elvitegravir and cobicistat data greatly reduce the risk for approval of Quad. Market expectations (Goldman Sachs, UBS and Zachs Investment Research) are that the Quad pill will be approved by late 2012 or early 2013. The results of Gilead's studies and the recent The Food and Drug Administration (FDA) standards point towards this claim.

FDA approved a new HIV drug from Johnson & Johnson in May 2011. The FDA approved the drug based on a study of 1,368 patients showing it was as effective as Sustiva, an older HIV drug already on the market. After 48 weeks of study, 83% of patients taking Edurant had undetectable viral levels, compared with 80% of patients taking Sustiva. Compare this result with Gilead's latest two Phase 3 clinical trials and we see that 88% and 90% of participants, respectively, successfully achieved and maintained undetectable viral loads (amount of HIV in the blood) after 48 weeks of the Quad regimen.

If approved, the Quad pill would be the third all-in-one regimen for treatment of HIV. The first, Gilead's Atripla, was approved in 2006; the second, Gilead's Complera, was approved in August 2011. Atripla was Gilead's top seller in 2010, generating $2.9 billion, whereas Complera is expected to generate $567 million in revenue in 2013.

Top research firms are convinced that subsequent to regulatory clearance, Quad has the potential to reach blockbuster status and become a market leading HIV medicine. There are upcoming patent expirations for Gilead, which can be offset by this approval and make Gilead a must-buy.

Additionally, Gilead filed a supplemental New Drug Application with the FDA in December 16, 2011 seeking approval of its blockbuster HIV drug Truvada for reducing the risk of the disease occurring through sex in uninfected adults.

Truvada was approved by the FDA in 2004 for the treatment of HIV-1 infection and is currently the most-prescribed antiretroviral treatment in the U.S., Gilead said. In its third quarter, Gilead reported Truvada sales of $744.7 million, up 11% from last year, on growth in Europe and the U.S..

If the sNDA is approved, Truvada would be the first agent indicated for uninfected individuals to reduce the risk of acquiring HIV through sex, a prevention approach called PrEP. According to current Centers for Disease Control and Prevention data, each year some 50,000 people are newly infected with HIV in the U.S.. Truvada is not currently indicated to reduce the risk of HIV infection.

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