Gilead Sciences’ HIV Drugs Clear a Hurdle

The outlook for Gilead Sciences (NASDAQ:GILD) brightened substantially last week. A U.S. government advisory panel recommended approval of Quad, the company’s experimental four-in-one HIV drug, and the off-label use of Truvada, an existing drug, to prevent HIV infections.

The down side? Gilead derives nearly 75% of its revenues from its HIV franchise, so any safety issues or approval delays with Quad or the off-label use of Truvada could have a serious negative impact on its earnings and stock price.

But if all goes as Gilead hopes, it could bring to market a blockbuster drug combo that will secure future earnings and prove tough to beat. Final approval from the Food & Drug Administration (FDA) for Quad and the new use for GILD’s blockbuster HIV treatment Truvada would mean billions of dollars in new annual sales.

Quad combines two existing Gilead drugs, Emtriva and Viread, with two experimental — and as yet, unapproved — drugs. If the agency gives final approval of the 4-in-1 drug, Quad would join the ranks of first-line HIV treatments.

If approved as a preventive, Gilead’s Truvada would be the first HIV drug for healthy individuals who are at a high risk of contracting HIV. The two-drug HIV therapy was first approved for use in 2004, but only as a treatment for HIV-positive individuals.

The panel’s recommendation is not binding on the FDA, although the agency usually agrees. An FDA decision on whether or not to approve the off-label use of Truvada is expected by mid-June, with a decision on Quad by Aug. 27.

While very promising, both drugs have raised concerns. A FDA report released earlier this month suggested Quad may require additional monitoring by regulators because of the potential for serious kidney complications.

Use of the once-a-day Truvada as an HIV preventive is controversial. If HIV-positive individuals take the drug, it could raise the likelihood of creating drug-resistant strains of the virus. And in one study cited by The New York Times, only 10% of participants took the drug as directed.

With a market cap of $39 billion, GILD is trading around $51.50 — nearly 50% above its 52-week low last August. It has a price-earnings-to-growth (PEG) ratio of 0.8, indicating it could be undervalued (with 1 being fairly valued), and a forward P/E of nearly 14.

Last year, Gilead spent $11 billion on Pharmasset, maker of the oral hepatitis C drug PSI-7977 — that was nearly a 60% premium on that company’s all-time high stock price. Gilead also acquired cancer-drug company Calistoga Pharmaceuticals for $375 million — with an additional $225 million to be paid if certain milestones are reached.

Despite Gilead’s efforts to diversify its revenue stream with non-HIV drugs, its current concentration in that area makes it imperative for the company to bring Quad and the new use of Truvada to market soon.

“Approval of the Quad pill is crucial for Gilead and may generate $4 billion in peak annual sales,” Deutsche Bank AG analyst Robyn Karnauskas said recently. “The drugmaker is facing the loss of half of its revenue from patent expirations on AIDS therapies starting in 2018.”

Bottom Line: Truvada is GILD’s most valuable product, followed closely by its 3-in-1 HIV drug Atripla, which combines Truvada with the Bristol-Myers Squibb (NYSE:BMY) drug Sustiva. Truvada and Atripla are each estimated to generate about $3 billion in annual sales.

But Gilead’s HIV drugs soon will begin to lose patent protections — and if their sales aren’t replaced, GILD could take a big hit on its top and bottom lines, with its stock price suffering as well.

The competitive threat is also very real for Gilead. It faces intense rivalry from other pharma companies’ HIV therapies. Dolutegravir, the new once-daily HIV drug produced by GlaxoSmithKline‘s (NYSE:GSK) and Pfizer’s (NYSE:PFE) ViiV Healthcare joint venture, is a strong entry, as is Merck’s (NYSE:MRK) Isentress.

This is a make-or-break moment for Gilead. Odds are that the FDA will approve both of its drugs this year. In fact, the agency would have a hard time not approving Truvada for HIV prevention in an election year. Quad’s approval could come with stricter monitoring requirements because of kidney function concerns.

While it’s hard not to like this stock at this price right now, I don’t like the fact that Gilead is so heavily dependent on a single drug type. I’d start out slowly if initiating a new position in GILD — and keep a very close eye on that approval process.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

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