Gilead Sciences: Several High Quality Drugs in the Developmental Pipeline

Gilead Sciences (Nasdaq: GILD) is a biotechnology firm that focuses on treatments for infectious diseases. Its most important drugs, by far, are Viread, Emtriva and Truvada, all treatments for HIV.

The company also markets AmBisome for fungal infections, Hepsera for hepatitis B and Tamiflu for influenza.

Competitive Advantages

Gilead has a solid drug franchise for HIV treatment. There are few competing HIV treatments that have demonstrated the same efficacy, and GILD has patent protection covering its drugs for a minimum of ten years. There are also few drugs in late-stage trials that would compete with the firm's lineup -- they face no real near-term competitive threats.

The company has also developed some combination HIV drugs, such as Atripla, that combine several popular treatments into a single drug. These drugs should continue to help GILD pick up market share in the HIV treatment market.

Growth Drivers

The market for HIV drugs will likely continue to benefit from improved diagnosis and treatment in the coming years. While there are still many patients who do not know they're infected with HIV, better education and public awareness has led to earlier diagnosis in both the U.S. and abroad. As a result, many patients are discovering their infection and seeking treatment earlier -- that helps push more growth for the firm's HIV drugs.

One factor that might accelerate that trend is that the U.S. Centers for Disease Control [CDC] recently recommended HIV testing become part of routine medical care. That could lead to a significant jump in testing and diagnosis over the next few years.

And Gilead also has some important new drugs that it has recently launched or are in late stages of development. One example is Letairis, a treatment for pulmonary hypertension. Analysts believe this drug could ramp up to produce more than $500 million in annual revenues by the end of 2010.

Valuation and Outlook

GILD trades at around 25 times forward earnings and has a long-term earnings growth rate of +16% annualized. That represents a PEG ratio of 1.77.

At first blush that seems expensive; however, my staff and I believe there's significant upside to GILD's long-term growth potential. Specifically, these long-term estimates project only relatively minimal contributions from new drugs being introduced over the next few years.

And one common criticism of GILD is that its overly focused on a single product group -- its treatments for HIV. But new treatments will expand the firm into new markets and better diversify its income stream.

Disclosure: none