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, Tamiflu, and Antivirals

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 fourth quarter (Q4) 2010 results and held its analyst conference.

Gilead is best known for selling anti-HIV drugs and for Tamiflu for flu, which is sold by Roche. Last year there was a major flu scare, resulting in Q4 2009 royalties including Tamiflu of were $228.0 million. This year royalty revenues were $68.4 million. That is actually up from Q4 2008 royalties of $40.4 million.

Analysts mostly saw 2009 royalty revenues as a one-time event in 2009, but making up for a y/y drop of about $160 million is quite a feat. For the therapies Gilead sells directly, Q4 2010 revenues were up 7% y/y to $1.93 billion versus $1.80 billion. Antiviral product sales were up 5% y/y to $1.7 billion.

Overall revenues were down 2% y/y, but on a very difficult comparison.

How were profits on $2.00 billion in revenues? GAAP net income was $626.4 million. Non-GAAP net income (excluding stock-based compensation and one-time expenses) was $779.3 million. Cash flow from operations was $775 million.

Mostly affecting the stock today was Gilead's stock buy-back plans. In Q4 $614 million was used to repurchase stock. The remaining pre-authorized $2 billion should be used during 2011, and another $2 billion was authorized. Buying back stock has helped keep up earnings per share, which rose, on a non-GAAP basis, to $0.95, up from $0.93 year-earlier despite the lower revenues and non-GAAP net income.

Gilead will be rolling out a number of new therapies over the next few years for HIV and Hepatitis C. In addition, new health guidelines are for physicians to start patients on retrovirals sooner after infection with HIV. This makes for a tremendous pool of new patient adds in the next three years, given that Gilead has a 68.5% share of this market.

Like all major drug inovators, Gilead has had some some potential products that have failed to achieve results. Developing drugs is expensive, and most drug candidates fail to gain FDA approval. You just figure that in as a cost of doing business, spread out over the successful drugs. All drug patents expire eventually, meaning price drops as generics become available, but again that is as it should be, as it spurs companies to continue to search for better drugs. Gilead's upcoming "quad" single pill therapy for HIV is an example of working for continuous improvement instead of sitting still.

Given all that, at some point Wall Street is going to realize that Gilead's PE ratio is too low. In my mind even now it should not be lower than 20. If it rose to 20 tomorrow, from today's 11, the price would run up to $71.35 per share from (as I write) $39.26. Nevertheless, there are risks, including the whims of other investors, so keep diversified!

See also:

my Gilead Sciences Q4 2010 analyst call summary
www.gilead.com