Friday's Overreaction Provides Great Entry Point For Gilead

| About: Gilead Sciences, (GILD)

Many analysts were worried when Gilead (NASDAQ:GILD) paid a steep premium for Biotech company Pharmasset. Gilead paid $11 billion to acquire Pharmasset, which had no drugs on the market, but several under development. Pharmasset's PSI-7977, which is targeting Hepatitis C, was the main reason biotech companies had been looking to acquire the company. Investors panicked on Friday when results of a Gilead/Pharmasset trial were not overwhelmingly successful.

Back in November, I discussed in an article the possibility of Gilead needing to possibly combine one of its drugs with PSI-7977 to make the best possible Hepatitis C drug. Gilead has done this with several of its bestselling HIV drugs. PSI-7977 is appealing to Hepatitis C patients if it can become approved. Currently, the drug does not rely on Interferon, which has some hard side-effects for patients. Interferon is used in several key Hepatitis drugs on the market.

The trial of GS-7977, the renamed drug, showed that six out of eight patients relapsed after being treated for 12 weeks. The relative small study targeted patients who had already not responded to other Hepatitis C drug treatments. Two more studies will be announced in the first and second quarter of 2012 for Gilead. The results will seen be over a larger period of time. These results will be more meaningful to future FDA approval and also to investors. Keep in mind that the drug is targeted for 2014 approval at the earliest.

Vertex Pharmaceuticals (NASDAQ:VRTX), which was one of my top ten stock picks for 2012, was one of the benefiting stocks after Gilead's announcement. Shares rose and ended up almost 5% up for the day. Vertex now trades up 18% on the year since it appeared on my annual list. I believe shares are still undervalued considering the price was $58 back in May of 2011. Vertex is ahead of Gilead with its Hepatitis C drug already on the market. The drug is one of the fastest-selling drugs of all time and is on its way to billion-dollar status. This potential hiccup by Gilead may extend approval time, which would mean more time for Vertex to capture revenue in the Hepatitis C market.

Gilead is a multi-billion dollar pharmaceutical company that will not live and die by the Hepatitis C drugs it acquired from Pharmasset. True, $11 billion is a large investment, but I still believe it will pay off big for Gilead and has the potential to make the company the largest player in two key markets. If the drug never lives up to its hype, Gilead still has a strong pipeline and great portfolio of drugs on the market. The key thing to remember is that the drug is not dead and this wasn't an FDA approval. The trial that the results are from was setup by Pharmasset before the acquisition. With a targeted 2014 approval, Gilead still has plenty of time to work out trials and test a combination of its own drugs with the newly acquired potential blockbuster.

I called for a share price of $52.44, based on valuation of 12 times earnings. Shares traded up to $56.03 in recent weeks before the trial data came out. In the article mentioned above, I stated that Gilead could double its market capitalization to $60 billion with the success of Hepatitis C drugs. Gilead now trades for around $35 billion. Results for FDA approval of the company's Quad pill, which combines all Gilead components to target HIV, should be announced during 2012 and should provide a nice boost to the share price.

I have been anxiously awaiting the possibility of buying shares of both Vertex and Gilead this year. The recent drop in Gilead's price provides the perfect entry point. I would hate to have to wait until after the Quad drug FDA approval to be buying shares.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GILD, VRTX over the next 72 hours.

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