Gilead Sciences, Inc. (NASDAQ: GILD) is one of the best large-cap idea in the biotech space because it's the only growth story that has earnings potentially doubling in the next 4 years from $4 in 2013 to at least $8 in 2016, driven by GS-7977 sales and conservative margins.
Gilead is poised to maintain its position as the market leader in HIV through the commercialization and development of two HIV therapies: Complera, a fixed-dose combination of Edurant and Truvada, and Stribild, a fixed-dose combination of elvitegravir, cobicistat and Truvada.
There is also substantial growth potential for Gilead in Hepatitis C Virus (HCV) and GS-7977 has the potential to become a key backbone therapy in an all-oral HCV regimen.
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The '7977 is probably the biggest area of upside as there is minimal new sales/marketing and R&D expense that really needs to occur relative to the size of revenues. Gilead's GS-7977 with genotype 2/3 is an easier one to treat Hepatitis C and the drug, in combination with generic ribavirin, could get its initial approvals next year.
Currently, the global market for Hepatitis C is estimated approximately $2 billion and is predicted to reach more than $10 billion in the next ten years. The suspension of Bristol-Myers Squibb (NYSE:BMY) clinical trial over safety issues will provide Gilead Sciences' GS-7977 well over a year lead to market.
The first company to get approval for the next generation drug for treating Hepatitis C will have a major first mover advantage in the market. This is because physicians are progressively deferring to treat patients with available, approved drugs.
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"Our EBIT margin could go from 42% to 50-60% driving impressive earnings power. Some super-bull models can get even higher than $10/share in 2016 using higher sales and better margins. We see 2016 earnings power of $8-10/share which using a 12-15x PE and DCF supports even higher $90-100/share theoretically over time," RBC Capital Markets analyst Michael Yee said in a note to clients.
The stock should grind higher in 2013 as it approaches and goes into the key inflection of growth which is 2014. The Gilead Sciences is two-pronged with the best Hepatitis C growth story and "margin expansion story" and the next leg of HIV, which may increase confidence on the revenue "tail".
Margins are probably the biggest area of upside as there is very minimal new sales/marketing and R&D expense that really needs to occur relative to the size of revenues.
Meanwhile, stocks don‘t typically go down into major product launches as analysis shows they are at worst flat but often continue up into the launch.
Gilead has achieved market leadership in HIV through the development of key backbone therapies Viread and Emtriva and their exclusive co-formulation with other drugs to create fixed-dose combinations (FDCs).
By combining multiple pills into one, Gilead improves compliance, a major issue in HIV treatment and creates a significant advantage over competitors' multi-pill regimens.
"We believe there are many additional benefits to GILD's FDC strategy and note two new drugs, GS-7340 (next-gen Viread) and cobicistat (booster), have increased GILD's strategic maneuverability," Oppenheimer analyst David Ferreiro said in a client note.
Consequently, the company could derive more cash flow from the HIV franchise prior to the patent cliff than is currently anticipated.
In fact in 2014 – the GS-7340 Phase III son-of-Viread- data may be the big catalyst that pushes Street to believe in the sustainability of the HIV tail and take the stock further up.