Gilead Sciences Readies Pipeline Value

Gilead Sciences (GILD) is an enourmously profitable company with a cheap stock price, as measured by its Price to Earnings (P/E) ratio. Yesterday Gilead released in second quarter (Q2) 2011 results and held its analyst conference.

A convergence of factors is driving Gilead profits higher. This trend should accelerate in 2012 and continue through at least 2015.

Gilead dominates the anti-retroviral, HIV drugs market in the U.S, where its market share has grown to 70.4%. Its global market share is not as high, but continues to ramp. Gilead AIDS drugs (Atripla, Truvada and Viread) brought in $1.76 billion in the quarter, up 11% y/y. Gilead's therapies are popular because they combine several drugs in a single pill, which makes for good patient compliance.

You might think that in a highly competitive field, with over 70% market share, there would be little upside left. A couple of factors show that thinking is wrong. Recent trials have shown the benefit of starting those infected with HIV much earlier than is currently the case, and that therapy reduces the risk of infection for partners by 96%. The percentage of Americans who are infected and who are already taking Gilead anti-retroviral drugs is estimated to be only 42%. Globally, as nations modernize and become wealthier, the demand for the best HIV therapies is also expanding.

In addition, in 2012 Gilead should be bringing to new combination pills to market, pending FDA approval. Endurant for HIV single tablet regimen of Truvada plus Rilpivirine is likely to get FDA approval in August. The Quad regimen data from two Phase III trials will be released in Q3 2011. In the likely case the data is positive, we should see Quad for sale in the second half of 2012. While some patients may shift from one Gilead pill to another, most the likely course is that Quad and Atripla will continue to take share away from older, non-Gilead therapies.

Branching out from anti-virals, Gilead has made progress with Letairis for pulmonary arterial hypertension, which generated $74 million in revenue. Ranexa for chronic angina hit $86 million in the quarter.

The coming pipeline of Gilead non-HIV drugs is so large that I can only give an overview here and refer you to the conference slide show (see link below). There are even more HIV therapies at stages of the pipeline, including two stand parts of the Quad, Elvitegravir and Cobicistat. There are four hepatitis drugs in phase II, and three in phase I, which will likely be made into a combination therapy for hepatitis C. There are six drugs, mostly in Phase II, with cardiovascular, respiratory and oncology targets.

Gilead had an astonishing free cash flow in the quarter of $943 million. I'd like to see a dividend, but I agree that at this point the stock is so undervalued that buy-backs make a lot of sense. Gilead spent $724 million in buy backs in the quarter. Yet it ended with a cash balance of $5.5 billion. Gilead is in a great position to acquire and develop more drug candidates.

Short of a Black Swan type disaster, I see Gilead as being a much, much larger company by 2020. That is why I own Gilead stock and may continue to acquire it (in a balanced fashion).

But even with a great growth and value combo like Gilead Sciences, there are the usual risks from competition, macroeconomics, failure to execute, etc. See SEC filings for a complete set of risks.

And Keep Diversified!

See also:

my Gilead Sciences Q2 2011 analyst call summary

Gilead Q2 2011 slide show

http://www.gilead.com/

Gilead Sciences Rebuilds Optimism for Pipeline

Biotechnology leader Gilead Sciences (GILD) had a good bounce after it reported third quarter earnings on Tuesday, October 19th. Earlier in the year the stock price had slumped on concerns about expiring Gilead patents. HIV therapy Viread, Hepatitis B treatment Hepsera, and Tamiflu for flu all have patents expiring this decade. Was the stock boost because of good sales in the quarter, a renewed stock buy back plan, or because analysts' concerns about replacement income sources for expiring patents were allayed?

Hepsera revenues in the latest quarter were $47.5 million, which is a nice chunk of money, but only 2.4% of the $1.94 billion in total revenues for the quarter. Tamiflu revenues (in the form of royalties from ) expand and contract with the flu season and perceptions of flu virulance; in Q3 they were $34.5 million, or 1.8% of total revenue.

Viread, though, is a much bigger deal. Quarter revenues for straight, one-pill Viread prescriptions were $184.3 million, or 9.5% of total revenue. In addition, Viread is one of three ingredients in Atripla, which brought in $605.3 million. It is also one of the two ingredients in Truvada, which brought in $669 million. So keeping in mind that all patents expire eventually, and every pharmaceutical and biotechnology company has these issues, I will focus on Viread.

Viread is the tradename of Tenofovir, a reverse transcriptase inhibitor, one of several classes of HIV drugs. Viread was approved by the FDA on October 26, 2001, so it has only been available to patients for 9 years. Since 2008 it has also been approved for treatment of chronic Hepatitis B. In the U.S. its patent expires in, but overseas patent laws and expiration dates vary on a per-country basis. Here is a table of Gilead's patent expirations from its 10-K filed with the SEC on March 1, 2010:

Products		U.S. Patent Expiration		European Patent Expiration
Vistide		2010		2012
Hepsera		2014		2011 (with SPC to 2016)
Letairis		2015		2015
AmBisome		2016		2008
Tamiflu		2016		2016
Macugen		2017		2017
Viread		2017		2018
Ranexa		2019		2019
Lexiscan		2019		2020
Emtriva		2021		2016
Truvada		2021		2018
Atripla		2021		2018
Cayston		2021		2021 (applciation pending)

Note that Viread patent expiration is seven years away, Truvada and Atripla are 11 years away in the U.S.

It should be noted that the most significant rival for anti-viral products, a joint venture of GlaxoSmithKline and Pfizer, had its patent of Epivir (lamivudine) expired in May 2010. Generic competitors not only hurt Glaxo/Pfizer, but could hurt Gilead's sales. Generics, however, have tended to be used in poorer countries and in earlier stages of HIV infection; they just are not as effective as the newer drugs.

While HIV and hepatitis drugs have greatly improved over the past 30 years, they remain far from perfect. HIV is prone to mutation. Cocktails of drugs are more effective than single drugs, but effects vary by the mix of HIV strains in patients.

Gilead's Atripla is the current status symbol of the war on HIV. Revenues for Q3 grew 23% year over year. Nevertheless, Gilead is trying a number of combinations (including newer drugs with components whose patents will expire beyond 2021), with good results in clinical trials so far. The most promising is the Quad regimen of elvitegravir, cobicistat, tenofovir and emtricitabine, which has completed a Phase II trial; it could complete a Phase III trial by the end of 2011.

Gilead spent $230 million for research and development in Q3. It ended with a cash balance of $5 billion. It is in a good position to acquire further drug candidates or even entire companies that it thinks could add to profits down the road.

Expiring patents should be taken into account, but the first important expiration for Gilead is in 2017. The existence of generics seldom means sales of trademarked drugs drop to zero. It can still use Viread as an ingredient in its combination therapies even after that. New therapies will be ramping revenues well before 2017.

Given that Gilead's non-GAAP trailing Price to Earnings ratio ended Friday at 10.7, for returns of 9.3% per year, I think the stock is a big old buy at this price, especially for investors who are beginning to see the down side of being 100% in low-interest bonds.

The ongoing stock buy-back is just a bonus for shareholders. It keeps pushing up the returns per share of the remaining stock.

For a detailed report on Q3 results see my Gilead Sciences Analyst Conference Call Q3 2010 summary.

But as always, keep diversified!

Gilead Should Rise on Penetration, Viread

Many company's stocks are undervalued in the current liquidity sqeeze. Gilead (GILD) is a good example of a growth company that is also a value stock right now. It last reported financial results for Q2 2008 [See my Gilead (GILD) Q2 2008 Analyst Conference Summary] with revenues of $1.28 billion, up 22% from Q2 2007. Operating cash flow was $426 million, demonstrating how profitable the business is.

Gilead is a pharmaceutical company selling six drugs with revenues of over $20 million per quarter. It is mainly known for its drugs for HIV: Truvada, Atripla, and Viread, which had revenues of $516 million, $355 million, and $150 million in the quarter respectively. Hepsera for chronic hepatitis B generated $90 million in income.

Since those results the FDA approved Viread for the treatment of chronic hepatitis B [see Gilead Viread press release]. Since Gilead has an established global sales force, the revenue ramp up should be relatively quick. While Viread will be competing with Hepsera, chronic hepatitis B has a very large untreated global patient population, so revenue from both therapies should grow.

There is no sign of a slowdown in the HIV franchise drugs either. The newest drug, Atripla, had a 67% revenue increase from year-earlier.

So why does Gilead have a relatively low PE ratio of 26 (and 20 forward looking) according to the Nasdaq Gilead summary page? There is no good reason except for the lack of liquidity in the financial markets. Other great companies have even lower PE ratios. Fear has driven investors to low-yield paper such as U.S. Treasuries.

Add to this basic picture Gilead's pipeline of potential new drugs, including Elvitegravir for HIV and some candidates for treating Hepatitis C.

I own Gilead stock. All stocks carry a variety of risks for investors.

So keep diversified!

More data:

www.gilead.com

Choosing a Biotech Stock 2: Gilead

Analyzing Gilead Sciences, Inc. (GILD) will act as a template and standard of measure for my project of choosing a biotechnology stock to add to my portfolio. Gilead is on a short list of stocks I know I would like in my portfolio. I have cash to buy one biotech stock. I also want to look beyond the biotech stocks I have been following (See the list of stocks I follow). For more on my guidelines for this process see Choosing a Biotech Stock 1: Overview. For background information on Gilead see my Gilead (GILD) page. So the questions left for Gilead are, what is a good price to buy the stock at, and is there any better biotech stock for the money?

Gilead has several drugs on the market. Here are the ones producing substantial revenues in Q2 2007:

Truvada $385.4 million.
Atripla $212.4 million.
Viread $154.9 million.
Emtriva $9.6 million.
Hepsera $75.2 million.
AmBisome $64.8 million.

The first Atripla, Emtriva, Viread and Truvada are all for treating HIV infections. Hepsera is for treating Hepatitis B. AmBisome, is for fungal infections, which are often a secondary problem with HIV infections. Tamiflu sales are through Roche and were not broken out.

Sales totalled over $1 billion in the quarter. Net income was $408 million. Cash generated was $512 million, but $455 million was spent on stock repurchases. At today's closing price market capitalization of Gilead is almost $35 billion. So the price of the stock is steep: if revenues and earnings flatten out, you would be getting only $4 billion in revenues and $1.6 billion in net income if you bought the whole company. Still, that gives a price-to-earnings ratio of about 22. Pretty safe. But you should always ask about the upside and downside risks.

On the upside Gilead could sell more of the products it currently has on the market. With revenues up 52% from the year-earlier quarter, it would be a good bet that there will be more revenue growth in the short run. In addition, with development costs for these drugs now in the past, net income should continue to ramp faster than revenue.

The other upside for biotech companies is in the pipeline of potential future products. This is harder to judge because the risk of failure to prove both safety and effectiveness to the FDA's satisfaction is hight. Gilead's pipeline has three Phase III candidates, a Phase II candidate, a Phase I candidate, and a number of preclinical candidates. They have the cash to license more candidates if necessary. They have a good track record, so I would expect at least some candidates to make it to market as the years progress.

Downside risks for drug companies have three components: macroeconomic, safety, and competitive. Macroeconomic risks may come from the economy in general or from resistance of private or government insurers. Safety would not seem to be a big issue with antiviral drugs, given the alternatives, but some times issues reveal themselves years after a drug is introduced to market. The main danger for Gilead would be competition. Someone could actually come up with a cure for HIV infections. While the possibility cannot be discounted, I see nothing on the short term horizon that falls in this category.

So as far as I am concerned, Gilead is a buy at this price, but at this price appreciation will more likely be in the long run than in the short run. Two categories of companies could beat that. One would be an underappreciated company that has a likely but unproven drug candidate. That would be a far riskier investment, but could pay off big. The other type would be a biotech company that has a better price-to-earning ratio, is likely to grow earnings faster than Gilead, or that has a more promising pipeline.

Before buying Gilead, even if it wins this competition, I would look a bit more closely at its pipeline. But for now this overview will serve my purposes.