I last profiled “the new general” of biotechs, Gilead Sciences (GILD – Analyst Report), in early May after the company delivered an earnings knockout punch to bears who thought a letter from a Congressman lecturing about drug pricing would leave the stock’s all-time high near $85 untouched again for a while.
Well that 92% EPS beat was just followed up in Q2 with a 44% beat. Gilead reported GAAP EPS that vaulted over 350% to $2.32 as revenue leapt 136% to $6.53 billion. And sales of that key drug in question, hepatitis C virus (HCV) treatment Sovaldi, hit $3.48 billion. Analysts expected only $1.61 on $5.86 billion total revenue.
How Did Gilead Become the New General?
In 2011 when GILD shares were only $20, the company bought Pharmasset for $11 billion to acquire its HCV pipeline. At the time it was considered a huge and risky bet for a company focused on HIV and AIDS treatments.
But since the approval and launch of Sovaldi, the sales ramp has been vertical for a disease affecting 3-4 million Americans and over 150 million worldwide. Trailing 12-month revenues have moved from $11.2 bln in Dec ’13 to $17.44 bln at the end of the June quarter.
Here’s what I wrote May…
The “Biotech Bubble-Burst” of 2014 will forever be remembered by the sector’s investors and traders for the pin that did the pricking in late March: a letter from US Representative Henry Waxman of California to Gilead Sciences about the pricing of their hepatitis C drug Sovaldi.
The drug launched in December and was on its way to blockbuster status — generally regarded as at least $1 billion in annual sales — almost immediately. But at $84,000 for a 12-weak treatment regime, it certainly raised some eyebrows.
“Our concern is that a treatment will not cure patients if they cannot afford it,” wrote Waxman along with other House Democrats from the Energy and Commerce Committee.
The Real Cause & Effect Fallout
In the weeks following that letter, the Nasdaq Biotechnology Index, best represented by its tracking ETF (IBB), fell nearly 20% and completed a full 24% correction off its all-time high of $275 down to $210.
The undisputed leader of the pack, Gilead, fell 16% after the letter and also corrected 24% in total off its all-time high near $85 set in February.
But two realities became fairly obvious during that bio-wreck selling…
1) The Biotech sub-sector was already frothy in Q1 and the Waxman letter was only an additional, if not the final, straw
2) The chances of Congress impacting drug pricing, without insurer support, is considered slim by most industry analysts
Why would healthcare insurers not jump at the chance to get Congress to intervene in Gilead’s pricing for Sovaldi?
Because the alternative for the cure that Sovaldi provides could be much more expensive. Estimates for liver transplants run between $400,000 and $500,000.
Another element here for insurers like Aetna (AET – Analyst Report) and UnitedHealth (UNH – Analyst Report) is that while these blockbuster drugs for rare or life-threatening disease get all the headlines about costs, the industry has actually been saving more money with the steady underlying growth of the generic drug business.
The Gilead Earnings Path
This is not to say that some day there won’t be legislative action to regulate drug pricing. This first shot across the bow gets a conversation going that could be very productive and educational for all sides.
Lawmakers need to understand the R&D dollars that a company and its investors are willing to risk with experimental drugs. The science alone is not their reward and if too many limits are placed on potential profits, less R&D might ever be started.
So while that national conversation begins, let’s look at the earnings growth path of one of the strongest biotech franchises on the planet. Below is the Zacks Price & Consensus chart for Gilead, showing the strong ramp in estimates after the spectacular Sovaldi sales numbers started pouring through in the past few months…
The details that you don’t see in this chart are that EPS estimates for this year have vaulted 21.4% from $5.98 to $7.26 in the past 60 days while 2015 projections have been raised 7% from $8.48 to $9.07.
With such a big drug launch, analysts are still getting their models tweaked to forecast full-year sales estimates which have ranged from $5 billion to $11 billion. I bet those 2015 estimates will keep going higher.
Clearly with Sovaldi bringing in sales of $5.8 billion in its first two quarters on the market, the figures show the high acceptance level among physicians and insurers for this life-saving treatment.
Why GILD is a Core Biopharma Holding
Sovaldi will be probably a cash cow for GILD for at least a couple of years. Even if the company does $10 billion in sales annually they are still only treating a small fraction of the market, with 3 to 4 million in the US afflicted with HCV and over 150 million globally. This is a huge market which Gilead dominates.
Plus, GILD has a productive HIV/AIDS pipeline. And its blood cancer drug, Idelalisib, could eventually compete with Pharmacyclics (PCYC – Analyst Report) Imbruvica in the treatment of chronic lymphocytic leukemia.
You can see the company’s full drug pipeline on their website. But suffice to say that when they beat the consensus top line number by 25% and 11% in the past two quarters, this is a biopharma powerhouse with surprising cash-generating capabilities.
After the company’s Q1 report, Deutsche Bank analysts raised their price target on shares from $132 to $135. Hardly a real bump, but it reaffirms their stance on the long-term growth they saw coming last quarter.
I’m with them for the long-term on that call. At $93, the stock is trading at only 10.25X next year’s projected consensus EPS of $9.07. But at a $143 billion market cap, it will take a while to even get to $100. So that’s why GILD is the perfect “slow-and-steady” stock for biotech investors.
It’s a core holding of many institutions and will only become more so with these growth projections. In May when shares were trading $78, I said “buying the stock in the $70s is probably a good place to begin new positions. And don’t miss those dips down into the $60s either.”
Now I would have to update that call and say “buy in the $80s and don’t miss those dips into the $70s.”
To explore an up-and-coming biotech with a potential breakthrough treatment for an even bigger liver disease affecting 350-400 million globally, hepatitis B virus (HBV), check out Zacks #2 Rank Arrowhead Research (ARWR) who is due to release Phase 2 results of their key drug ARC-520 this quarter.
ARWR shares have seen recent institutional buying by BlackRock and Marxe-Greenhouse.
Disclosure: I own ARWR shares for the Zacks FTM Portfolio.
Kevin Cook is a Senior Stock Strategist for Zacks.com where he runs the Follow The Money Portfolio.
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