Since its founding in 1987, Gilead (GILD) has focused on developing and delivering medications that advance the treatment of life-threatening diseases, resulting in a number of successful drugs in the marketplace and big profits for investors. 

Gilead’s primary areas of focus include HIV/AIDS, liver disease and serious cardiovascular and respiratory conditions.  Gilead is the game changer in HIV treatment.  Of the nearly 600,000 patients being treated for HIV in the United States, the company reports that 76% of those patients are on a Gilead product.

Their portfolio of 13 marketed products includes a number of category firsts and market leaders, including Atripla, the first single-tablet regimen for HIV infection. The company’s first HIV product, Viread, has also more recently been approved for the treatment of chronic hepatitis B, which is the leading cause of liver cancer worldwide and affects an estimated two million individuals in the United States alone. 

Gilead is also responsible for the well-known drug Tamiflu, which was instrumental in controlling last year’s outbreak of swine flu.

In 2009, BusinessWeek ranked Gilead #1 in its listing of the 50 best-performing companies, up from #2 the previous year. Its revenues exceed $7 billion and has a market cap of $36 billion. Its strong product lineup has led to a five-year annual revenue growth rate of almost 40%. 

In late April, management reported record first-quarter results: total revenues of $2.09 billion, up 36% over 2009’s first quarter; product sales of $1.79 billion, a 24% increase; net income was $854.8 million, up 45%; and non-GAAP EPS of $0.99 per share, up 50% over last year’s Q1.  Revenue and normalized EPS were slightly above expectations while operating profit and margin improved significantly.

This increase in sales was driven primarily by Gilead’s antiviral franchise, including the strong growth in sales of Atripla and continued growth in sales of Truvada, as well as the addition of Ranexa (an angina treatment) to Gilead’s commercial portfolio.

Q1 partner-based royalty revenues were $297.8 million, up from $82.9 million in 2009. This strong increase was driven primarily by higher Tamiflu royalties from Hoffmann-La Roche due to increased sales related to influenza pandemic planning initiatives worldwide.

More to Come

For any biotech/pharma stock, the company’s pipeline is always an important catalyst, and management also reported progress on that front.  This past February, the FDA approved Cayston as a treatment for the improvement of respiratory symptoms in cystic fibrosis patients.  They also recently reported results on several drugs in Phase II clinical trials.

Most recently, they announced that as part of a license and collaboration agreement with Johnson & Johnson, two collaborative pivotal Phase III studies met their primary efficacy objective. The studies were for Gilead’s Truvada and one from J&J (TMC278) as a treatment for HIV in treatment-naïve patients.  Johnson & Johnson also announced that full study results will be presented at a scientific meeting later this year, and that the submission of the drug for regulatory review is on track for the third quarter of this year. 

The two companies are also working toward an agreement to make the fixed-dose combination of Truvada and TMC278 available in the developing world, and if approved, the new product would become the second complete antiretroviral treatment regimen for HIV available in a single tablet taken once daily.

Our Opportunity

GILD has really faltered since its $49 high in February because of the recent health care legislation, which was perceived as a major negative for the company. Management lowered their revenue forecast for 2010 by about $200 million because they expected to receive less of an insurance reimbursement for their AIDS drug. The stock went on a steady decline until recently bottoming at $32.91.

The selling, however, was way overdone because of the broader market concerns. During much of that time, investors were looking for any excuse to sell, and reduced revenue projections were enough for many to head for the exits.

That can be a good reason, but you need to know the full story to make the right decision. The full story is that Gilead had over $7 billion in revenue last year. A $200 million drop sounds like a big number, but it’s “only” a 3% hit, whereas the stock has fallen more than 25% from its high. It’s something the company would rather not face, but it doesn’t significantly alter its growth prospects.

Speaking of growth, the financials are on fire. In the first quarter, Gilead announced revenues of $2.09 billion, up 36% from the year prior. Net income was $854.9 million, or $0.92 per diluted share, a 45% jump from $589.1 million ($0.63 per share) the year before. They announced a $5 billion share buyback program in May, so management knows their stock is cheap right now.

GILD has ranged from approximately $40 to $50 during most of the past year before breaking below $40 in May.  When looking at GILD’s current valuation, the opportunity for significant upside (and minimal downside) is compelling.  With even a worst case scenario, GILD’s 2011 P/E multiple (11x–12x) is well below its historical level (25x) and that of competitors.  And as its new drugs move from pipeline to market, investor confidence should return and earnings multiples expand. 

GILD is a buy below $38 for an initial target of $42, which may be conservative.