Gilead Sciences Rebuilds Pipeline Optimism
GILD

October 24, 2010

Biotechnology leader Gilead Sciences 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 virulence; 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:

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!

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