A bullish outlook for Gilead from Seeking Alpha author Chris Katje. His view is that Gilead will have market dominance in both HIV and HCV. He sees that Gilead will have full control of the Pharmasset HCV portfolio through the buyout, thus negating any worry about royalty payments. I'd also add the potential for co-formulation between Pharmasset's portfolio and Gilead's current HCV portfolio, which has always been Gilead's hallmark. An interesting read and it seems the rest of the market seems to agree with Katje, as Gilead stock has received several outlook upgrades from analysts. It just took some time for the initial sticker shock to wear off.
Acquisition of Pharmasset
Gilead Sciences (GILD) announced its intent to acquire Pharmasset (VRUS) for a whopping $11 billion on Monday morning. The deal has led many analysts and investors to question if Gilead overpaid for the deal. I think the deal is a great long-term play for the company and actually could present a buying opportunity of shares, which were down sharply after the announcement. Shares were up around five percent the following day after the announcement. Gilead will now be a large player in the HIV and Hepatitis markets.
Pharmasset has no drugs on the market, which is the biggest reason why people question the valuation. Drug candidate PSI-7977 appears to show enough promise that other companies were nibbling at acquiring the company. Gilead is confident in its acquisition and is funding the deal through cash and $6 billion in debt it is taking on. Hepatitis C is being targeted by this drug and it could actually save many Americans from the life threatening liver damage that is usually caused by the disease and leads to many liver transplants. The drug is expected to be filed with the Food and Drug Administration in 2014. Pharmasset owned the worldwide rights to the drug so Gilead will take full control and will not have to worry about licensing or royalty payments. Gilead now will be the leader in the race to find an all oral drug for the treatment of Hepatitis C.
Why the Acquisition and Hefty Premium
Gilead presented a slide show on its website shortly after the announcement to acquire Pharmasset. Gilead reconfirmed its goal of creating the best Hepatitis C drug, which would be determined by some of the following:
Taken Once Daily
Manageable Side Effects
Higher Cure Rates Than Current Drugs on the Market
Increased Treatments With a New Drug
Gilead has recognized that a combination of two or more drugs may be needed to create this super Hepatitis C drug. This is where I believe that Gilead’s acquisition will ultimately pay off. Gilead has combined several of its own drugs with products of other companies to create better acting and more effective drugs for patients.
Competition in Hepatitis C Market
Several other Hepatitis C drugs have popped up on the market recently. Victrelis is a drug owned by Merck (MRK), acquired through its acquisition of Schering Plough. The drug has so far been a disappointment as it only brought in $31 million of revenue in the third quarter reported on October 31, for Merck. Incivek, a drug owned by Vertex Pharmaceuticals (VRTX), on the other hand posted sales of $419 million in the past quarter. Analysts have already been lowering price targets of VRTX because of the likely competition from PS-7977 pending approval. Vertex will enjoy a couple of years of dominating market share before the competing drug enters the market. Annual sales could hit $2 to $3 billion for Vertex. Merck on the other hand is playing second fiddle and is likely to never see blockbuster status with its Hepatitis C drug.
Gilead’s Biggest Acquisitions
Gilead has a long history of acquiring other drug companies as many large drug companies do. Highlights include:
1999 Nexstar Pharmaceuticals - Gained two drugs through the acquisition. One, Ambisome, is still a marketed drug by Gilead. Deal seemed to be made more for the company’s intent on expanding in Europe.
2003 Triangle Pharmaceuticals - Emtriva, now a part of two Gilead drugs, was gained through this $464 million acquisition. Atripla and Truvada both use the component emtricitabine, a former Triangle product.
2006 Corrus Pharma - Has a current drug in Gilead’s pipeline aimed at treating Cystic Fibrosis.
2006 Myogen - Myogen was the most expensive acquisition previous to Pharmasset coming in at $2.5 billion. This has also been one of the most important and successful acquisitions made by Gilead as it brought three drugs, two marketed, and one currently sold by Gilead to the company.
2009 CV Therapeutics - Billion dollar purchase helped strengthen and diversify Gilead’s pool of drugs as it gained two drugs aimed at cardiovascular diseases.
Several other million dollar deals were made by Gilead over the last eight years. Gilead has made many of its acquisitions to strengthen its own technology and combine existing drugs with new ones.
Gilead’s Products
Gilead remains the market leader in drugs that treat the HIV virus. Its marketed products in the HIV market are:
Atripla is marketed with Bristol Myers Squibb (BMY) after its approval in 2006. The drug treats HIV and will lose patent expiration in 2021.
Complera is one of Gilead’s newest drugs on the market. It was approved by the FDA in August of 2011, and is co-marketed with Johnson and Johnson (JNJ).
Emtriva was approved in 2003 and will expire in 2021.
Truvada treats HIV and is one of Gilead’s top selling drugs. It was approved in 2004 and will lose its patent protection in 2021.
Viread treats Hepatitis B and HIV viruses. The drug was the first successfully launched HIV drug in 2001 by Gilead. The drug, which is a huge seller for Gilead, will lose patent protection in 2017.
Gilead has drugs in several other fields that compete with numerous other large drug companies. The other drugs currently on the market are:
Ambisome treats infections like fungal, meningitis, and Cryptococcus. The drug was approved in 1997 and will lose patent protection in 2016. The marketing partner on the drug is Astellas Pharma.
Cayston is Gilead’s cystic fibrosis drug that was approved in 2010. The drug has exclusive patent protection until 2021. Gilead markets the drug on its own and maintains all revenue from the drug.
Hepsera treats Hepatitis B and is owned and marketed by Gilead. The drug was approved in 2002 and its patent expires in 2014.
Letairis has since 2007 treated Pulmonary Hypertension. The drug is co-marketed with GlasxoSmithKline (GSK) and loses patent protection in 2015.
Lexiscan is a cardiovascular drug marketed with Astellas Pharma and it will lose patent protection in 2019.
Macugen is an age-related macular degeneration drug first approved in 2004, which is shared with Pfizer (PFE) and will lose patent protection in 2017.
Ranexa treats chest pain and will lose patent protection in 2019. The drug is co-marketed with Swiss drug company Roche.
Tamiflu treats the influenza virus as an oral capsule. The drug, which loses its patent protection in 2016, is licensed to Roche.
Vistide treats Cytomegalovirus and also certain eye problems involving the retina. The drug was founded in 1996 and has since lost its patent protection.
Gilead’s Pipeline
Gilead has twenty drugs listed on its site in current phases of trial. The drugs target HIV, Hepatitis C, numerous Cardiovascular diseases, Diabetes, Leukemia, Non-Hodgkin’s Lymphoma, and other diseases. Like many other large drug companies, Gilead has kept a strong pipeline targeting some of the biggest diseases affecting the world today. Three drugs targeting HIV are in Phase III trials currently. The Pharmasset acquisition will improve the company’s pipeline as it focuses on becoming a large player in the Hepatitis C market. Gilead will likely test several of its own Hepatitis drugs with Pharmasset products to create dual drugs much like it has with its HIV drugs.
The most important drug for Gilead in my opinion is known as the Quad. The drug combines Gilead’s own products and will help cut part of its revenue share with other marketing partners. The drug has held up well in trials. The drug will be brought in front of the FDA in 2012 and could be a substantial revenue earner for Gilead. The Quad drug is cutting down on symptoms from Gilead’s Atripla including dizziness, insomnia and depression. There are two trials testing Gilead drugs together in the Quad trials. Atripla had sales of $2.9 billion over the last year. However a portion of that revenue is given to Bristol Myers Squibb for its contribution to the drug. The approval of the quad pill could provide a nice bump to the share price in 2012.
Gilead’s Current Sales
Gilead is the leader in the HIV drug market and has shown its dominance. From the slide show presentation after the Pharmasset announcement it listed trailing twelve month revenue at $7.4 billion. The total market for HIV drugs is currently $13 billion so Gilead controls 50% of this blockbuster medical category. In the last fiscal year Gilead had earnings per share of $3.32 based on earnings of $2.9 billion.
Analysts call for earnings of $4.37 for the next fiscal year. With a closing share price of $39.28 on Friday, the price-to-earnings ratio is less than nine. According to Yahoo Finance, over 91% of the shares are currently held by institutions and mutual funds. More than 900 funds hold shares of Gilead as it represents one of the best plays on the healthcare and drugs industry.
Analyst Upgrades
Several days after the acquisition of Pharmasset was announced, analysts have upgraded shares. Citigroup and Bank of America both upgraded the shares after revaluating. Bank of America said that the company’s Hepatitis C program could some day be worth $15 to $30 billion. Gilead currently has a market capitalization of just under $30 billion so this deal could clearly define the company for the future.
My Share Valuation
I think the buyout of Pharmasset is a great purchase for Gilead. Gilead has made great use of drugs acquired through pipelines of companies it has bought out. Gilead absolutely owns the HIV drug market and the deal should help insure it gets a large portion of the Hepatitis C drug market in the future as well. For the coming year shares should trade closer to 12 times earnings, which would represent a share price of $52.44. The approval of the Quad drug as well as earnings announcements could power shares past $60. I think long term the company could double its market capitalization to $60 billion with its marketed HIV drugs and several Hepatitis C drugs on the market. I think shares would be a great purchase for an IRA as a bet on the company for the future.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GILD over the next 72 hours.
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