Inside Wall Street: Gilead for value, growth

One of world's largest and profitable biotechs gains on its HIV and hepatitis drugs.

By Gene Marcial Aug 1, 2012 1:43PM

Image: Prescription medicine expenses © Don Farrall/Photodisc/Getty ImagesGilead Sciences (GILD), one of the few profitable biotech stocks around, is starting to appeal to both growth investors and value believers.


With its powerhouse leadership in HIV/AIDS treatments and its acquisition of a pipeline of drugs for the Hepatitis C virus through its purchase of Pharmasset in January 2012, Gilead has become an inexpensive stock for value investors and an enticing buy for growth adherens because of its strong earnings growth potential.     


So don't bet on Gilead yielding its leadership position role in HIV/AIDS and its strong initiatives to gain approval for its next-generation drug, GS-7977, for the Hepatitis C virus.

In brief, Gilead is making sure its dominance in HIV/AIDS stays strong even as the first of its string of patents start expiring in 2018.


"We assume Gilead's HIV franchise continues to build with minimal near-term impacts from competition and that the company's franchise in Hepatitis C will begin in 2014 with the launch in the U.S. of GS-7977 followed by a launch in Europe," says Jason Kolbert, biotech analyst at investment firm Maxim Group.


With a detailed market and product forecasts through 2020, Kolbert says that while the market will continue to weigh the HIV and hepatitis issues, he figures Gilead will generate  significant free cash flow through the end of the decade. And combined with his fully diluted 2020 earnings estimate of $8.38 a share and a sum-of-the-parts valuation, he reaches a target price of $70 a share for the stock.


Currently trading at $54 a share, the stock is pretty close to its 52-week high of $55.08 hit on Feb. 7, indicating the stock's continued appeal to institutional investors. And now that Gilead is becoming attractive to both value and growth investors, the stock, which hit a 52-low of $35.34 on Aug. 10, is likely to continue to fly higher.


"Gilead's strong current fundamentals led to a high quality beat-and-raise" situation when the company reported second-quarter earnings in late July, says Thomas J. Russo, analyst at investment firm Robert W. Baird. The big news, he adds, is confirming the path to market its Hepatitis C drug. Specifically, Gilead acknowledged it had reached agreement with U.S. and European regulators to expedite approval of the GS-7977 Hepatitis C drug.


As a result, Gilead now appeals to both growth and value investors, notes Russo. Gilead's low multiples may continue to appeal to value-oriented investors, but the acquisition of the Hepatitis pipeline made the stock a growth story. That’s because "the GS-7977 drug is the most compelling asset in the Hepatitis-C space, a strategic fit for Gilead," which is expected to "contribute multiple billion dollars per year starting in 2014," says Russo.


A secular earnings growth at a healthy double-digit pace with potential to accelerate in 2014, coupled with the still attractive valuation multiples "keep this stock interesting as a value story too," argues the analyst. So a positive investor sentiment is building up for Gilead in the space.


At the same time, the fundamentals are still sound for Gilead's dominant, market-leading HIV franchise. With new patient share count already at 85% in the U.S. and 75% in Europe, market growth is the "most important current driver for Gilead," says Russo.


"We are encouraged by prospects for new combination drugs to extend Gilead's market-leading franchise," says Steven Silver of S&P Capital IQ, who rates the stock a buy as a core biotech holding. Its three HIV drugs are Truvada, a once-a-day combination tablet formulated with previous-generation drugs Viread and Entriva. In May 2012, the Antiviral Drugs Advisory Committee of the FDA voted to approve Gilead’s Quad QD regimen for HIV consisting of four new drugs. The FDA has set a target "action date" of Aug. 27, 2012. Analysts expect Gilead to launch the new Quad regimen immediately after its formal FDA approval.


Betting on biotech stocks is laden with risks, usually best left to investment professionals who either thrive or perish in trying to divine their individual values. But some turn out to be long-term winners, such as Amgen (AMGN), one of the world's largest biotechs and Medivation (MDVN), which develops novel small-molecule drugs for serious diseases, including prostate cancer.


Gilead is definitely up there in the roster of leading biotech companies.

Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.





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