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Balanced View on Gilead

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We are maintaining our Neutral recommendation on Gilead Sciences, Inc. (GILD - Free Report) with a target price of $61.00. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

Gilead posted its second quarter 2012 results in July 2012. The company’s second quarter 2012 earnings (excluding special items but including stock option expense) of 94 cents per share beat the Zacks Consensus Estimate of 92 cents. Second quarter adjusted earnings decreased approximately 1.1% from the year-ago period due to higher-than-expected expenses.

Revenues climbed 12.5% to $2.41 billion, beating the Zacks Consensus Estimate of $2.29 billion. Product sales spiked 14% to $2.32 billion, driven by antiviral products, such as Atripla (up 10% to $904.0 million), Truvada (up 10% to $785.9 million), Viread (up 16% to $215.4 million) and Letairis (up 38% to $101.6 million). Products sales were also aided by the launch of Complera/Eviplera last year.

The HIV portfolio at Gilead got a huge boost recently when the US Food and Drug Administration (FDA) cleared its HIV combination pill, Stribild, in August 2012. Stribild (once-daily) was approved as a first-line therapy for treating adults with HIV-1 infection. Stribild is a combination of elvitegravir, cobicistat and Truvada. We note that Truvada itself is a combination of Viread and Emtriva.  

We are impressed by Gilead’s robust pipeline led by late-stage HIV candidates, elvitegravir and cobicistat, which offer significant commercial potential and should help to drive growth on approval. In July 2012, Gilead filed a marketing application seeking approval for elvitegravir in the US.

The candidate is currently under review in the EU. Gilead is also seeking the US and EU approval for cobicistat. Cobicistat acts as a “boosting” agent, whose addition increases blood levels of protease inhibitors, such as Bristol-Myers’ (BMY - Free Report) HIV drug Reyataz and Johnson & Johnson’s (JNJ - Free Report) Prezista, thereby enabling the HIV therapy to be dosed once daily.

On the second quarter 2012 conference call, Gilead provided an update on another pipeline candidate, GS-7977. Gilead stated that it is evaluating GS-7977 (as a combination therapy) in patients infected with genotype 1- 6 HCV in four phase III studies. Regulatory filings are expected in mid-2013.

Gilead also intends to move the fixed dose combination of GS-7977 and GS-5885 in HCV (genotype 1) patients into phase III studies by year end. Regulatory filings are expected by mid-2014.

Apart from the late-stage pipeline, Gilead has multiple candidates in mid/early stages of development. The successful development of the pipeline candidates will help drive growth.

However, we are concerned about patent challenges against the company’s key HIV drugs. Most of Gilead’s important products are facing patent challenges from companies seeking to launch generic versions of those drugs. The entry of generic versions of Gilead’s HIV drugs would be a huge blow to the company.

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