Gilead: A Stock For The Future

Aug.13.12 | About: Gilead Sciences, (GILD)

Edited By Kate Boehme

Gilead Sciences (NASDAQ:GILD) is a biopharmaceutical company involved in discovering, developing and commercializing medicines. Gilead's key areas of focus are HIV/AIDS, liver diseases - such as hepatitis B and C - and cardiovascular/metabolic and respiratory conditions. This company operates in North America, Asia Pacific, and Europe. Gilead is a leader in the biopharmaceutical industry, with a portfolio of 14 marketed products, as well as a growing pipeline of investigational drugs and 4,600 employees.

Gilead has strong partnerships around the world; recently it signed an agreement with three Indian drug manufacturers. Ranbaxy Laboratories, Mylan Laboratories, and Strides Arcolab will manufacture and distribute low-cost generic versions of Gilead's HIV medicine 'Emtriva' in developing countries. These manufacturers will receive technology and funding from Gilead to help reduce their overall manufacturing costs. There are already more than 2.7 million HIV patients in developing countries using medicines innovated by Gilead.

Products

Gilead has an incredibly strong pipeline, which includes a total of 14 drugs at the moment. Two drugs are particularly vital to the Gilead portfolio: Atripla and Truvada. These two drugs actually account for more than 70 percent of the company's total revenue. At the moment, Atripla is one of the most prescribed drug in the US. Atripla brings in 39 percent of Gilead's total revenue, making it the company's star product. Truvada is the second most significant supplier of company revenue, with a contribution of about 34 percent. Gilead declared revenues of $2.41 billion for the second quarter, showing an increase of 13 percent from the same period last year.

Future Potential

Recently, Gilead received approval for Truvada to be prescribed for heterosexual men in danger of infection by HIV. Truvada is already in the market, but this new label will permit the company to market to a larger customer base. Some physicians were already prescribing Truvada for HIV prevention, but the scale of the prescription was small, since the market only included high-risk profiles. 50,000 American are infected with HIV every year, with a total 1.5 million Americans infected with HIV in the United States.

This new approval will encourage physicians to recommend the drug more broadly, meaning that the number of prescriptions ought to increase substantially. Truvada is intended, however, to be used in conjunction with conventional HIV prevention techniques such as condoms. Truvada is a daily-use drug, and the patient must be HIV negative at the time of prescription. Truvada costs $14000 for a one-year presription; Gilead currently plans to keep the price at current levels. The cost of the drug is normally covered by insurance.

Here, I have assessed the impact of increased revenues from Truvada. In the table below, company sales have been divided into segments, with only the increased Truvada revenues considered in respect to the target market size.

(x 1000)

2nd quarter 2012 Sales

Percentage of Total Sales

3rd Quarter 2012

4th Quarter 2012

1st Quarter 2013

2nd Quarter 2013

3rd Quarter 2013

4th Quarter 2013

Atripla

$904,023

38.95%

$904,023

$904,023

$904,023

$904,023

$904,023

$904,023

New Truvada Sales(20,000 new consumers and 2,000 increase each quarter)

$280,000

$308,000

$336,000

$364,000

$392,000

$420,000

Truvada

$785,933

33.86%

$785,933

$785,933

$785,933

$785,933

$785,933

$785,933

Viread

$215,414

9.28%

$215,414

$215,414

$215,414

$215,414

$215,414

$215,414

Complera/Eviplera

$72,909

3.14%

$72,909

$72,909

$72,909

$72,909

$72,909

$72,909

Hepsera

$26,191

1.13%

$26,191

$26,191

$26,191

$26,191

$26,191

$26,191

Emtriva

$7,813

0.34%

$7,813

$7,813

$7,813

$7,813

$7,813

$7,813

Letairis

$101,634

4.38%

$101,634

$101,634

$101,634

$101,634

$101,634

$101,634

Ranexa

$95,555

4.12%

$95,555

$95,555

$95,555

$95,555

$95,555

$95,555

AmBisome

$83,653

3.60%

$83,653

$83,653

$83,653

$83,653

$83,653

$83,653

Other Products

$28,115

1.21%

$28,115

$28,115

$28,115

$28,115

$28,115

$28,115

Total Sales

$2,321,240

$2,601,240

$2,629,240

$2,657,240

$2,685,240

$2,713,240

$2,741,240

Click to enlarge

*Values in thousands.

This table only shows the expected impact of new Truvada sales; all other figures are unchanged. I believe Truvada will prove to be a valuable drug, with its new label, increasing revenues significantly.

Gilead also has presented Quad for US and EU approval, with the drug receiving a favorable recommendation from the FDA committee. Quad is a combination of two existing Gilead drugs: Emtriva and Viread. Quad could be a blockbuster for Gilead, if approved. Gilead already gets more than 70 percent of its revenues from HIV-related drugs. FDA approval for Truvada has already strengthened one aspect of Gilead's HIV-related drug market; the approval of Quad will only further enhance this already strong market presence.

Gilead has a Hepatitis C drug currently in phase three trials; GS-7977 has been leading the competition for almost a year. Bristol-Myers Squibb recently suspended its phase three trials for its own Hepatitis-C drug due to safety issues. In fact, Bristol-Myers Squibb, Novartis, and all other competitors in the market are behind Gilead in production. Other companies in the industry will likely only be able to market their Hepatitis C drugs in another year after Gilead, at the earliest, and even then only if they are approved. The Hepatitis market currently stands at $2 billion and is expected to increase to $8.7 billion by 2022. If everything goes according to plan, Gilead will be able to market the drug by mid-2014. With increases in the size of the Hepatitis market making it especially attractive, Gilead is perfectly poised to benefit from being first to move on the Hepatitis C drug.

Summary

Gilead is one of the few pharmaceutical companies to have such an impressive portfolio of drugs, with even better products about to enter the market. This company has two particular drugs about to hit the market that have immense potential. These two drugs could bring in massive revenues for Gilead after they are released in the next two years.

In terms of stock metrics, Gilead is ranked somewhere at the middle of its peers. Biogen (NASDAQ:BIIB) and Amgen (NASDAQ:AMGN) support relatively higher trailing P/E ratios of 26 and 18, respectively. Gilead has a PEG ratio of 1.11, which is one of the lowest among the large-cap biotech stocks. However, Celgene (NASDAQ:CELG) has a PEG ratio of 0.93, thanks to high growth expectations. Analysts expect EPS for Celgeen to grow at an annualized rate of 22 percent, compared to Amgen's growth expectation of 11.5 percent.

Pharmaceutical companies face massive challenges from patent expiration and competition from generic drug manufacturers. Many drug companies therefore constantly look at the possibility of adding new drugs to their portfolios. Meanwhile, Gilead is on the verge of adding two major drugs to its portfolio. Both of these drugs will cater to hugely lucrative markets. With such advancements, I expect Gilead to raise its earnings significantly, outperforming the rest of the market.

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