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FDA's Truvada Approval Seals Gilead's Leading Position

July 20, 2012 | About:
All eyes are now set on Gilead Sciences (GILD) as FDA approved the world's first ever drug to prevent HIV. The once-a-day pill can now be prescribed to people at high risk of contracting HIV. Truvada has been on the market since 2004, but it was not prescribed for prevention. The FDA approval of its preventive use puts the company on a higher position in the industry. I think this move provides further growth opportunities for Gilead.

Company Profile

Gilead is a biopharmaceutical company which produces the leading HIV drugs Atripla, Complera, Truvada, Emtriva, and Viread. The company also specializes in the treatment of other life-threatening diseases like hepatitis, serious cardiovascular and respiratory conditions, cancer and inflammation. Based in Foster City, California, Gilead has a workforce of 4,600 and operates in North America, Europe, and the Asia-Pacific. The company's corporate strategy centers on partnerships it had established with other pharmaceutical companies for commercialization, clinical research, and manufacturing. It has a market capitalization of about $40 billion.

Gilead is a company that has expanded rapidly since its establishment in 1987. Last year, the company earned $8.4 billion in revenues. Half of revenues were derived from the sales of its European operation. Truvada and Atripla, the blockbuster drugs of Gilead, make up 75% of the company's product sales in 2011. Gilead is a growth powerhouse. The revenues experienced double-digit growth rates in the past 5 years.

The patent of Truvada, the market leader for HIV treatment, will expire on 2017. Gilead's future growth relies on its ability to push for the approval of its drugs on the pipeline. Already, an integrate-based quadruple combination HIV drug, Quad, is seen by analysts as a future blockbuster for Gilead.

Competitor Analysis

Gilead faces fierce competition from GlaxoSmithKline (GSK), Bristol-Myers Squibb (BMY), and Roche Holding AG. However, Gilead has forged its way to lead in the HIV drug business. The company, being smaller than the rest, has a greater potential for growth than its competitors. Currently, it has the largest profit margin among its peers with 29.68%. GSK, Bristol-Myers, and Roche have profit margins of 18.44%, 17.8%, and 21.18%, respectively.

Looking at the fundamental ratios, Gilead has the highest EPS at $3.33 and a competitive book value per share of $9.65. The share is undervalued with PEG ratio of only 0.83, making it a healthier investment than the rest. Roche's PEG ratio is 1.67 while GlaxoSmithKline has a PEG ratio of 1.96. Bristol-Myers' PEG ratio stands at 16.37. Gilead's revenue is growing more rapidly than its peers. The average annual revenue growth of Gilead for the last 3 years is 15%. GSK grew only by 6.51% annually, while Bristol-Myers hardly grew at all.

Comparison of fundamental ratios
Fundamental ratio GILD BMY GSK Roche
EPS 3.33 2.23 3.11 2.8
ROE 38.10% 33.44% 54.09% 73.01%
PEG Ratio 0.83 16.37 1.96 1.67
Profit margin 29.68% 17.8% 18.44% 21.18%
BVPS 9.65 9.67 5.51 3.77
Revenue growth (average for the last 3 years) 15.34 1.02 6.51 -2.34
Source: Yahoo Finance

Competition in the HIV drugs industry

GlaxoSmithKline is challenging Gilead's lead in the HIV drug business. GSK has produced a drug which is claimed to be more effective than Gilead's Atripla. GSK has developed the first HIV drug back in 1987, but Gilead later took over the lead. At present, the giant pharmaceutical company is making a comeback where it has ventured with Pfizer to produce Dolutegravir. This experimental drug is said to have reduced the virus more effectively with fewer side effects than that of the Atripla.

Analysts however said that GSK owns only about 40% of the economics of this drug. Pfizer and GSK's Japanese partner Shionogi owns the other portions. Also, even if the Dolutegravir affects the marketability of Atripla, Gilead still has its upcoming Quad to further boost its lead in the market.

Summary

In my opinion, Gilead's demonstrated ability to innovate is what sets it apart from the rest. The news of Truvada further affirms Gilead's lead in the HIV drug industry. Because of this, I believe that the rapid growth it has exhibited in many years is yet to peak. Its current size and promising drug products in its pipeline give us an idea of its growth prospects. Also, its fundamental ratios are more desirable than most of its competitors in the pharmaceutical sector. This makes Gilead an attractive addition to any investor's portfolio.

About the author:

ogulsev
Efsinvestment.com website offers simple do-it-yourself type of investment ideas. You can download excel files that can easily calculate the Fair Value of a stock, along with O-Metrix score and Margin of Safety.

Investment philosophy is to first determine the maximum loss, and invest accordingly. Like many value investors, we prefer to invest in stocks with the highest dividend yields, and highest EPS growth potentials. Telecommunication and energy stocks in emerging markets are among the favorites.

Based on extensive quantitative analysis, in any market, going short is risky. Statistical analysis shows that technical indicators work only if they are strong enough to convince the majority of the investors. Do not buy a stock at the top, do not sell a stock at the dip.

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