Gilead Sciences (GILD: Charts, News, Offers), a large-cap biotech best known for its leading HIV drugs Truvada, Viread and Atripla, has fallen on hard times recently, starting with the passage of Obama’s health care reform bill, compounded by lowered guidance last quarter and exacerbated by disappointing earnings and guidance last week. There are concerns that the expiration of several key patents, including the company backbone antiviral Viread, in the coming decade would dry up the entire Gilead pipeline, as socialized medicine would inevitably move towards a flood of cheaper generics.
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Gilead currently has a 50.4% share of the HIV drug market. Its market is mainly the United States and Western Europe, with a small share in Japan. Shareholders’ primary concern is the lack of forward thinking purchases. Gilead’s two largest purchases to date have been Myogen (pulmonary drugs) in 2006 for 2.5 billion and CV Therapeutics (cardiovascular drugs) in 2009 for 1.4 billion. Unfortunately these drugs currently only constitute 13% of Gilead’s revenue. 80% is constituted of its HIV drugs. The majority of the remaining 7% comes from royalties from Roche Pharmaceuticals, the distributor of Tamiflu, a leading influenza medication. Gilead’s board has to date failed to address the long term concerns of analysts, who have formed a strong consensus that Gilead needs to have a new source of income after its patents expire.
Viread, the Gilead-patented trade name of Tenofovir, is Gilead’s heart – it is the essential blocker of reverse transcriptase, a critical enzyme in viral production in HIV patients. It is the key ingredient of Truvada (a fixed dose combination of Viread and another antiviral, emtricitabine) and Atripla (a once daily pill), and its effectiveness is the root of Gilead’s success in the HIV drug market. Once Viread’s patents expire in 8 years, the ANDA approved generics and the other large pharmaceuticals will have a huge advantage and Gilead stands to lose a huge market share. These generics will not be threats until each patent expires in the US and Europe: Viread: US in 2017, Europe in 2018; Truvada: US in 2021, Europe in 2018; and Atripla: US in 2021, Europe in 2018. However, the expiration of Viread will be a mortal wound unless Gilead can move on to other profitable drugs by then.
To maintain its current leading position in the HIV field, Gilead has two upcoming products that may help keep its competitors at bay. The first is a pill, in the works with Johnson & Johnson (JNJ: Charts, News, Offers) that combines Truvada with TMC275, a reverse transcriptase inhibitor, and will offer patients a once daily treatment, previously only possible with Gilead’s own Atripla. Gilead plans to file a NDA (New Drug Application) for the once daily pill by the end of 2010. The second is the highly anticipated “Quad Pill”, a combination pill of Gilead’s four drugs that is said to significantly reduce the central nervous system side effects of previous HIV medications. The Quad Pill has been in Phase III clinical trials since April. If the Quad Pill is approved after Phase IV, it is predicted to be a multi-billion dollar drug that can keep Gilead ahead of the generics due to its difficulty and cost to replicate.
Gilead’s primary concern now is shifting its pipeline away from Viread without spreading itself thin. Gilead currently has 4.62 billion in cash and securities, an increase from 3.9 billion reported at the end of 2009. Since 2006, Gilead has acquired several companies specializing in non-HIV fields in an attempt to diversify. Myogen, the makers of the pulmonary drug Letairis was its largest purchase at 2.5 billion. It has been considered a failure and to date has yet to break the 500 million mark in yearly sales. It also acquired Corus, the makers of the cystic fibrosis antibiotic Cayston for 365 million in 2006, which has low yearly estimates between 100 to 300 million. Its second largest purchase at 1.4 billion in 2009 was CV Therapeutics, best known for its heart drug Ranexa, and has peak yearly sale estimates at 500 million. Its most recent purchase is the $120 million acquisition of CGI Pharmaceuticals, a developer of small molecule kinase inhibitors, which can be used to stop inflammatory diseases such as rheumatoid arthritis. Of these, none can be considered the “next Viread”, and at best are currently only serving as secondary income, accounting for 13% of the total revenue. Gilead has also been focusing on developing treatments for Asian Hepatitis B (HBV) to expand into Asian markets outside of Japan.
Gilead announced a stock buyback of 5 billion in May, to a muted market response. Many investors and analysts believe that Gilead should start paying a dividend, but so far there are no plans to do so. Gilead is not without its bulls, though. Needham and Co. has reiterated their “Buy” rating on Gilead post-earnings, with a price target of $48, citing a favorable long-term view of their antiviral pipeline. There are also floating takeover rumors, Pfizer being the most commonly named suitor, and Gilead’s current distressed state may leave it open to a larger pharmaceutical looking to inherit over half the HIV market. Gilead’s 29.75 billion market cap makes it a viable takeover candidate to the likes of Pfizer (market cap 117.60 billion) or current partner Johnson and Johnson (market cap 158.95). Despite these rumors, however, investors should not hedge their bets that Gilead would be bought out.
Despite the fact that Gilead needs to grow new roots in order to maintain its market position, its fundamentals, the stock technicals and essential product line are hard to dismiss. For investors with a longer time frame, buying the stock today may be a golden opportunity, a bet that Gilead’s newly sown seeds in other fields will grow to fruition in the coming decades, and that by the time Viread’s patent expiration will be nothing more than an afterthought. There may yet be a new “balm in Gilead” to be found.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
“…as socialized medicine would inevitably move towards a flood of cheaper generics.”
More accurately stated: the loss of corporate welfare through the removal of nearly 30 years of government granted monopoly.
Furthermore, as the new health care reform plan does not include plans for the government to take over any hospitals, pharma cos, or any other health care provider, use of the term “socialized medicine” is certainly false and misleading.
Would it be such a shame if free markets were to finally allow for competition that would bring prices down to an affordable level for suffering patients? Perhaps Gilead should develop new innovative products or learn to live within the means provided by the market as do the rest of us who can’t buy government protected monopolies or subsidies.