Streetwise

Lauren Rudd

Sunday, June 15, 2014

Don't Be Gullible

The apparitions that continually mesmerize and beckon the unsuspecting reminds one of the Sirens in Greek mythology whose seductive songs lured sailors to their death. Gullibility is rich fare for those who feast on the carrion of the uninformed. To quote from Idiot America by Charles Pierce, “Fact is that which enough people believe. Truth is determined by how fervently they believe it.”

Gullibility was well illustrated recently as Gilead's future was unfairly tainted by the seductive songs of the naysayers who suddenly predicted doom and the demise of Gilead (GILD) after Merck announced it would acquire Idenix and with it Idenix’s hepatitis C pipeline.

Even the most minimal research shows that none of the three clinical-stage hepatitis C therapies in the Idenix pipeline has made it to Phase III trials. The most advanced, Samatasvir, is in Phase II. It is true that Phase III trials for hepatitis C therapies are not as rigorous or lengthy as those required of drugs such as those that treat cancer.

However, when combined with the time the FDA takes to make a decision, it means that commercialization of Samatasvir is at least a year away. Moreover, there is always the possibility of failure in Phase III. And separate trials would be required for any combination therapy. Gilead acquired Pharmasset in 2011, but did not begin selling Sovaldi until Q4 2013.

It is interesting to note that the press releases surrounding the Merck acquisition use the word "promising" at least twice, once to describe Idenix's therapies and once to describe Merck's own therapies. Promising is not the same as proven. And you have to believe that Gilead looked at Idenix's pipeline but did not feel it was worth buying. A smarter move by Merck would have been to acquire Gilead.

Gilead’s market value continues to appreciate thanks to its stellar research and development programs. And the company remains the dominate player in the HCV market with a market share worldwide of more than 80 percent. As awareness of hepatitis grows in developing countries and HCV treatment penetration increases, this market will likely exceed expectations.

Based on Q1 2014 sales results and the known demand for Gilead’s Sovaldi, several analysts have upped their FY2014 sales targets. Citigroup estimated sales at $9.5B and Barclays at $10B; and these were before CMS (Centers for Medicare and Medicaid Services) announced on June 3, 2014 that it would cover the cost for hepatitis C virus screening. That alone could increase Sovaldi sales.

Of course there is always the argument that Gilead is a one-trick pony with its corporate future tied to Sovaldi. Not true, Gilead has a pipeline that includes: Cobicistat (HIV/AIDS), Elvitegravir (HIV/AIDS), a fixed-dose combination of ledipasvir and sofosbuvir (HCV infection), Idelalisib (Indolent non-Hodgkin's Lymphoma), and Idelalisib (Chronic Lymphocytic Leukemia).

In addition, Gilead has a number of other drugs are still in Phase I-III trials and at least some of those in Phase III are bound to be approved in the not-too-distant future.

Revenues during the first quarter of 2014 increased to $5.00 billion from $2.53 billion a year ago. Net income increased to $2.23 billion or $1.33 per share, up from $0.43 per share. Non-GAAP income, which excludes acquisition-related, restructuring and stock-based compensation expenses, was $1.48 per share as compared to $0.48 per share a year ago.

A year ago my 2013 earnings estimate for Gilead was $2.14 per share with a 12-month share price estimate of $62. So how did the company do? Gilead’s shares recently closed at $79.54, well above my estimate. Earnings came in at $2.04 per share, a dime shy of my estimate.