Gilead Sciences: Biotech Powerhouse

09/04/2013 8:00 am EST


Tyler Laundon

Editor, Cabot Small-Cap Confidential

In 1987, Michael Riordan, at age 29, started a small biotech firm and then raised $20 million in venture capital and private equity financing, paving the way for an IPO in 1992, notes Tyler Laundon of Top Stock Insights.

After spending more than $90 million on drug R&D over eight years, his company—Gilead Sciences (GILD)—introduced its first product, which targeted an AIDS-related eye disease called CMV retinitis.

Gilead then introduced a number of new drugs that rapidly gained market share. Tamiflu, which would gain some notoriety in 2005 when the bird flu pandemic struck, was an influenza treatment. And Viread was introduced in 2001 to treat HIV/AIDS. Both antiviral drugs were smashing successes.

The company's HIV/AIDS, hepatitis B (and more recently hepatitis C) treatments would catapult the company forward, generating rapid revenue growth and profitable operations throughout the next decade.

Just over a decade ago, it wasn't possible to treat HIV/AIDS with pills. Today, Gilead has six different pills to treat the diseases and its pipeline includes a number of high-potential tablets.

Its focus on developing single-pill treatments, such as Atripla, which is the first single pill HIV treatment approved by the FDA, has helped this line of business considerably.

This franchise is a cash cow and generates high margins and steady growth as a result of its dominant position in the market. In fact, Gilead's HIV franchise generates 75% of the company's revenues.

Today, Gilead is an $86 billion company with highly successful drug treatments for these life-threatening diseases. With sales still growing—and with three more drugs well along in the HIV franchise pipeline—Gilead looks to be able to dominate in this space for years to come.

Gilead is on the threshold of major growth in the treatment for chronic hepatitis B and C, largely as a result of its controversial $11 billion acquisition of Pharmasset in 2011. At the time, the acquisition price was more than one-third of Gilead's market cap.

However, since the acquisition, Gilead's stock has risen by 225%. The acquisition of Pharmasset helped Gilead build up its pipeline of liver disease treatments including hepatitis B and C, especially in the area of all-oral regimens.

While liver treatments currently make up less than 25% of the company's revenues, the company is building a global power house in this area.

The engine behind this machine is the hepatitis C drug candidate Sofosbuvir, which is currently under FDA review, with a ruling due out in December of this year. Based on the success in trials to date, we should expect Sofosbuvir to gain approval and go into production in 2014.

In fact, many analysts expect the drug to become the leading therapy in hepatitis C, with revenue potential approaching $8 billion by 2020, a number equal to more than 80% of company-wide sales in 2012.

Gilead has proven itself to be one of the leading biotechnology firms in the world. Gilead's management has steered the company in the right direction, time and time again.

And even though shares have been a stand out performer, Gilead has been buying shares back, indicating that despite the climb, management believes shares are still undervalued.

It's entirely reasonable to expect the company's sales to accelerate over the next five years as new drugs come on the market. I'm looking for at least 20% average annual revenue growth and 25% average annual net income growth over the next five years.

My near-term price target on shares is $70.00, and I expect to raise this target as Gilead makes progress with both its HIV/AIDS and liver lines of business.

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