Gilead goes strong

The drugmaker stands to benefit as HIV care shifts toward earlier detection and treatment.

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By Eugenia Levenson, writer-reporter

In the past six months, how often have you looked at your 401(k) and other investment balances?
  • Every day
  • Once a week
  • Every month or so
  • I can't bear to look

NEW YORK (Fortune) -- Another day, another drugmaker merger. On Thursday Gilead Sciences joined the industry's acquisition binge by agreeing to buy CV Therapeutics for $1.4 billion in cash.

Gilead (GILD) says the purchase will boost its cardiovascular business by adding CV's (CVTX) chest-pain drug Ranexa and Ranexa's 170-strong cardiology sales force - an important asset as Gilead looks ahead to marketing its hypertension drug Darusentan, currently in Phase III trials.

"Gilead's a company that's throwing off $2 billion in cash a year, and you know they're going to invest it," says Geoffrey Porges, an analyst at Sanford C. Bernstein. "This deal is preparing the ground for a strong launch for Darusentan. Think of it as doubling-down in the cardiovascular space."

Still, while some big drugmakers have turned to mergers to spur growth - see Merck's (MRK, Fortune 500) planned purchase of Schering-Plough (SGP, Fortune 500), or Roche's (ROG) pursuit of Genentech (DNA) - Gilead is already generating growth internally.

The California-based biotech has made Fortune's list of Fastest-Growing Companies for three of the past four years and shows no signs of stalling. The stock has returned 207% since 2004 - while the S&P 500 (SPX) has fallen 35% - and it proved resilient as the market dropped: Gilead is down 10% since last March, vs. 47% for the index. And after posting record revenues and earnings last year, Gilead is the rare firm that expects to put up double-digit sales gains again in 2009.

The key lies in the company's premier portfolio of HIV treatments, the engine of a booming antiviral business that brought in 88% of Gilead's $5.3 billion in revenue last year. Now the company seems poised to gain from several large-scale shifts in HIV care that are expected to expand the population of treated patients.

"Gilead is benefiting from one of the few fundamental growth acceleration stories in any industry other than bankruptcy," says Porges.

The company's performance looks even more impressive given that royalty payments for its flu drug, Tamiflu, plummeted last year as governments finished stockpiling.

"Earnings have been depressed by the Tamiflu impact, but that's rolling off because those sales, for the most part, are gone," says Connor Browne, a portfolio manager of the Thornburg Value fund, where Gilead is a top holding. "Now you'll get to appreciate the power of their HIV business."

The company's core troika of HIV medicines was developed around a proprietary compound called tenofovir, which has become a mainstay of HIV treatment.

"Usage is driven by clinical data, and Gilead designed a better drug that also happened to be more tolerable [for patients] than its competitors'," says Aaron Reames, who follows the company for Wachovia Capital Markets. Roughly 80% of new patients in the U.S., and more than 70% in the European Union, begin treatment on a tenofovir-based drug, and the Department of Health and Human Services guidelines now list it as the only preferred backbone therapy.

Gilead's once-daily combination pills, Truvada and Atripla, are two of the most frequently prescribed HIV regimens. They offer significant advantages over multiple-dose treatments: For one, they're easier to manage, so patients are more likely to stay on course, which in turn leads to better results. "Gilead identified the importance of convenience, less frequent dosing, and combination pills earlier than anyone else," says Porges.

All this puts Gilead in prime position to benefit from two systematic changes in HIV care. The first is a public policy push for broader, more aggressive testing and early detection of the disease. The second is a shift toward earlier treatment, as evidence mounts that patients who begin therapy when their T-cell counts are higher tend to live longer. Both trends will expand the population of patients receiving medication while extending the duration of treatment.

With strong cash flow and a $3.2 billion year-end cash cushion, the company is in top shape to finance the CV Therapeutics acquisition, invest in internal growth, and continue its share buybacks. Meanwhile, shares have been trading around $44, or about 18 times 2009 earnings.

Long term, however, Gilead's future will depend on whether the company can sustain the breakneck pace of its HIV franchise. There is promise in Gilead's pipeline that's not being factored into its current stock price: The first four-in-one, once-daily HIV drug, which combines Truvada with two new agents, is set to begin Phase II trials this spring.

Unlike Atripla, which consists of Truvada paired with a Bristol-Myers Squibb (BMY, Fortune 500) drug, the so-called quad pill would contain only Gilead compounds. That would translate to better margins on higher revenues, putting Gilead in position to profit even when patients switch to the quad pill from its existing treatments.

In fact, analyst Porges estimates that if the drug is approved in 2012, it could peel away Truvada patients but still boost 2014 revenues and earnings by more than 30%, paving the way for another growth spurt. To top of page

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