When I last wrote about Gilead Sciences (GILD), on July 26, 2011, I said "A convergence of factors is driving Gilead profits higher. This trend should accelerate in 2012 and continue through at least 2015." [See Gilead Sciences Readies Pipeline]. Gilead stock that day closed at $42.16. Last Friday April 27, GILD closed at $52.16, following the announcement of Q1 results after market close on Thursday.
The forward-looking story is now largely about curing Hepatitis C, but first the backward-looking numbers.
In Q1 revenue was $2.28 billion, up 4% sequentially from $2.20 billion and up 18% from $1.93 billion in the year-earlier quarter. GAAP net income was $442.0 million, down 34% sequentially from $665.1 million and down 32% from $651.1 million year-earlier. GAAP earnings per share (EPS) were $0.57, down 34% sequentially from $0.87 and down 29% from $0.80 year-earlier.
The poor GAAP profit showing relative to revenue was mainly related to the acquisition of Pharmasset, closing on January 17, for $11 billion. Pharmasset held important therapies for hepatitis C that Gilead wanted to add to its own hep C pipeline. Non-GAAP EPS was $0.91, up from $0.87 year-earlier.
Why the emphasis on hep c? While Gilead Sciences has branched out into treatments for cardiovascular diseases, its primary expertise in in anti-viral drugs, particularly for HIV infections, which lead to AIDS if untreated. Because of the effectiveness of its single-tablet, multi-drug combinations, Gilead dominates that market. Gilead also markets Viread for Hepatitis B. The past generation of Hepatitis C therapies have limited effectiveness, have a number of side effects, and cannot be administered orally.
Before the Pharmasset acquisition Gilead had four hepatitis drugs in phase II trials, and three in phase I, and said they would likely be made into a successful combination therapy. Pharmasset added Phase III candidate PSI-7977 (now GS7977), Phase II candidate Mericitabine, and Phase II candidate PSI-938, all for hep C. Pharmasset also brought candidates for HIV and hepatitis B treatment.
Thursday Gilead executives reviewed recent hep C data and clarified their strategy. The GS-7977 plus ribavirin hepatitis C (HCV) genotype 1 Phase 2 study showed no detectible virus after 12 weeks of treatment, but at end of treatment the majority of patients relapsed. GS-7977 plus BMS-790052 (owned by Bristol Myer) showed high hepatitis C cure rates: >90% for genotype 2/3 and 100% for genotype 1.
Based on those and other results, Gilead is designing Phase III studies that could be fully enrolled by the end of May. Several paths are available to get therapies to market, but they need to talk more to regulators before the final trials are initiated. They would clearly prefer an all-Gilead single tablet regimen that cures most hep C, so working with Bristol Myer would be a fall back position. Given the number of drugs Gilead owns and could combine with 7977, it is a good, but not certain, bet that something will work.
At the same time it is a race, since other companies are also trying to break into the all-oral hepatitis market. It is a huge market. An estimated 150 million people have chronic hepatitis C, with the U.S. figure likely somewhere between 3 and 6 million (many people have undiagnosed hep c).
It is too early, I think, to put a number on the value of a hep c cure, but note that Gilead paid $11 billion for Pharmasset. They went through most of their cash and borrowed some $5.5 billion to do it. Gilead annual cash flow runs around $2 billion.
The main risk here is that a competitor (or multiple competitors) will also create an all-oral hepatitis c therapy, and might even gain FDA approval first. Even so, it is a big market and I don't think Gilead's present price reflects much of this opportunity.
Even with a great growth and value combo like Gilead, there are the usual risks from competition, macroeconomics, failure to execute, etc. See SEC filings for a complete set of risks.
And Keep Diversified!
Disclaimer: I am a long-term investor in Gilead Sciences. I will not trade in the stock for a week from today.
my Gilead Sciences Q1 2012 analyst call summary