Gilead Sciences: Rapid Growth Expected From New Products

Total revenues for Gilead Sciences' (GILD) fourth quarter of 2006 were $899.2 million, up 48 percent compared to total revenues of $609.3 million for the fourth quarter of 2005. Net loss for the fourth quarter of 2006 was $1.67 billion, or $(3.62) per share, which included an acquisition-related charge of $2.04 billion for purchased in-process research and development (IPR&D) due to the Myogen acquisition and after-tax stock-based compensation expense of $24.9 million reflecting the impact of the expensing of options that begin on January 1, 2006.

The loss for the quarter was expected. Now GILD can fully benefit from the potential drugs they obtained from the Myogen acquisition; especially, ambrisentan, an orally available endothelin receptor antagonist for the potential treatment of pulmonary arterial hypertension [PAH]. On February 16, 2007 the FDA announced that GILD received Priority Review status for the company's New Drug application for marketing approval of ambrisentan (5 mg and 10mg) for the once-daily treatment of pulmonary arterial hypertension [PAH]. The target review date is June 18, 2007. Analysts expect up to $1 billion revenue from ambrisentan once it is fully accepted into the market. Marketing of ambrisentan could begin immediately after the company receives approval on or before June 18, 2007.

Net income for the fourth quarter of 2005 was $281.6 million, or $0.59 per diluted share. Non-GAAP net income for the fourth quarter of 2006 was $372.8 million, or $0.78 per diluted share, which excluded the impact of the purchased IPR&D charges. Non-GAAP net income for the fourth quarter of 2005 was $256.5 million, or $0.54 per diluted share

Product sales were a record $768.1 million for the fourth quarter of 2006, up 56 percent over the same period in 2005. For 2006, product sales were $2.59 billion compared to $1.81 billion in 2005, a 43 percent increase. This growth continued to be driven primarily by Gilead's HIV product franchise, including the strong uptake of Atripla (efavirenz 600 mg/ emtricitabine 200 mg/ tenofovir disoproxil fumarate 300 mg) following its launch in July 2006 in the United States, and continued strong performance of Truvada (emtricitabine and tenofovir disoproxil fumarate) and Viread (tenofovir disoproxil fumarate), as well as Hepsera (adefovir dipivoxil).

Guidance for 2007

For 2007 Gilead is expecting product sales of $3.4 – 3.5 billion compared to product sales in 2006 of $2.59 billion. This guidance does not include any sales from new products and it does not include royalty and contract revenue. This is 31.3 to 35% increase for the year. With the growth in international sales just beginning, I suspect this might be low. Keep in mind Gilead is very good at under promising and over delivering.

Key Drivers

Gilead is experiencing rapid growth in its portfolio of HIV drugs as shown in the chart below. They also have a additional HIV drugs in various stages of testing. This growth in HIV drugs is likely to continue through 2007 and beyond as there seems to be little competition on the horizon.

Growth continues to be balanced between the United States and the rest of the world. This balance bodes well for the company.

Growth of new products will eventually drive new sales for Gilead. At this time we do not know the success, if any, of these new products. Such is the nature of biotechnology companies.

The company’s acquisition of Myogen could soon begin producing revenue. On February 16, 2007 the FDA announced that GILD received Priority Review status for the company's New Drug application for marketing approval of ambrisentan (5 mg and 10mg) for the once-daily treatment of pulmonary arterial hypertension [PAH]. The target review date is June 18, 2007. Analysts expect up to $1 billion revenue from ambrisentan once it is fully accepted into the market. Marketing of ambrisentan could begin immediately after the company receives approval on or before June 18, 2007.

On March 23, 2007, Gilead Sciences announced that GlaxoSmithKline's (GSK) Marketing Authorisation Application [MAA] for ambrisentan for the treatment of arterial hypertension [PAH] was validated by the European Medicines Agency [EMEA] following review by the Committee for Medicinal Products for human Use [CHMP]. Following the validation of an MAA, the dossier is distributed to members of the CHMP for formal review. As a result of this validation, Gilead will receive a milestone payment from GlasoSmithKline. The amount of this payment was not released. This action is further confirmation that ambrisentan should have a good ruling from the FDA.

Conclusions

Gilead Sciences should continue to experience good growth and has potential new sales from its acquisitions. The value and expected growth of these new products will become more clear over time, starting with ambrisentan.

Investing in drug and biotechnology companies should be for aggressive investors seeking growth opportunities, as they typically have high valuations (P/E is 42) which can cause the price of the shares to fall quickly with any bad news. The rapidly growing portfolio of HIV drugs should continue to generate good growth in revenues for the company during 2007. However, it remains unclear how many more years this growth can continue and the impact new product sales will have on the company’s performance. At this time I would be a buyer of shares of GILD on dips to key support areas. And as always, keep the appropriate trailing stops in place to protect capital and profits once they develop.