June 15, 2006 (Vol. 26, No. 12)

Strong First Quarter Results Prompt Analyst to Set Bar High for Company

Gilead Sciences’ (www.gilead.com) candidate to replace cocktail drug therapies for HIV/AIDS with a single fixed-dose triple combo pill and its influenza drug, which is the only effective therapy against H5N1 bird flu virus, delivered a 75% earnings growth for the company in 2005.

“We believe that sizable upside in royalties from Tamiflu and growing share in the HIV market drove much of this run. After rating the stock a buy for much of 2005, we remain at a hold rating after the first-quarter results,” says Jason Napodano, senior biotech and pharmaceutical analyst at Zacks Investment Research (www.zacks.com).

Napodano is concerned, however, that Gilead’s long-term growth rate could decline to 8% in 2008, unless the company can dramatically enhance its mid-stage pipeline. “It is time to put that enormous $2.54 billion cash war chest to use,” suggests Napodano.

While Gilead Sciences develops and markets drugs for hepatitis B, flu, and infectious diseases, including viral, fungal, and bacterial infections, Napodano believes it is perhaps the world’s premier play on HIV/AIDS therapy. He considers Truvadaa reformulation of drugs Viread and Emtrivafor the treatment of HIV/AIDS, the current growth engine for Gilead.

Additionally, the joint venture with Bristol-Myers Squibb to develop and commercialize a combination of Bristol’s Sustiva and Gilead’s Truvada in the U.S. makes Napodano positive about continued growth in this market place. “We believe this combination pill has billion-dollar potential, and it may lead to upside of our long-term earnings model.”

With regards to Tamiflu, in addition to continued sales, based on the threat of the avian flu, Gilead could see sizable increases in the royalty payments from partner Roche in 2006 in their copromotion deal for the drug, Napodano predicts. The downside, he warns, is the risk of the strain becoming resistant to the drug.

Gilead Sciences’ total revenues for the first quarter of 2006 were $692.9 million compared to the previous year’s $430.4M. Net income for the first quarter of 2006 was $262.7M, or $0.55 per diluted share, which included after-tax share-based employee compensation expense of $23.5M. As of May 31, 2006, Gilead had a market cap of $26086.07M and the stock was $57.33. “Our target remains $60,” asserts Napodano. “We advise investors to wait for a pull back into the low $50s before establishing a position.”

Positive results from the Truvada-Sustiva clinical trial comparing the combination with Combivir (GlaxoSmithKline) and Sustiva will only push Truvada sales, believes Napodano. “After the very impressive first quarter sales of $248.9 million, way above our $220 million forecast, we have sizably raised our Truvada estimates for the rest of the year.” In addition, Gilead filed the NDA for the Truvada-Sustiva pill in April 2006 and Napodano predicts launch before the fourth quarter.

Another driver for the substantial first quarter was Viread, which came in above Napodano’s forecast of $174M at $191.8M. Napodano attributes this to a build up of inventories in the quarter and a sizable order from Brazil.

Napodano also remains optimistic on sales of chronic hepatitis B therapy Hepsera, as it steadily gains market share. “We see Hepsera posting sales of $214 million in 2006, up roughly 15% from the $187 million delivered in 2005.”

“Gilead’s growth is too heavily dependent on Truvada,” warns Napodano. It is being sold to other pharmaceutical and biotech companies, which accounts for 25󈞊% of the total. Also, “Truvada is a lower margin product than Viread. So as Truvada ramps, Gilead will see gross margin deterioration. Once Truvada-Sustiva is on the market, the deterioration will accelerate.”

Gilead’s pipeline must start to deliver. The company demonstrated in a Phase I/II trial that GS-9137, a once-daily integrase inhibitor, is highly effective when used as a monotherapy or in combination with ritonavir (Abbott’s Norvir) in reducing HIV viral load. “We regard this candidate as extremely important to Gilead’s future given the inevitable slow-down in Truvada sales later this decade,”Napodano concludes.

Previous articleLew Kontnik
Next articleRichard A. Gibbs, Ph.D.