A Strong Week for Gilead

It's been an interesting couple of weeks for Gilead Sciences (Nasdaq: GILD  ) . If we were to put the news in baseball terms, the company benefited from a bunt to get on base, a solid single to advance the runner, and an error by the other team resulting in a run. Let's take a look at these events and what they mean for investors.

Earnings bunt
On July 26, Gilead reported earnings of $0.91 per diluted share for the second quarter, down 2% from the same quarter last year. Using our baseball analogy, that probably doesn't seem like enough to get on base.

However, delving into the reasons behind the slight decrease in earnings puts things in a more positive light. First, revenue increased by a respectable 13% compared with last year. Second, the primary driver of increased costs that caused the dip in earnings was a 40% rise in research and development expenses.

Strategically, pouring more money into R&D makes sense for Gilead. The company noted that $77.7 million of the $113.8 million increase in R&D expenses stemmed from clinical studies and outside studies related to the liver disease and oncology therapeutic areas. Both areas represent solid growth opportunities for Gilead.

The results for the quarter weren't splashy, but they reflected calculated decisions aimed at positioning the company for future success. That sounds like a bunt to me.

India single
Seven days after releasing its quarterly results, Gilead announced a new partnership with three Indian companies to make generic versions of its emtricitabine-based HIV drugs more readily available in developing countries. More than 2.7 million patients with HIV living in developing countries already receive regimens containing TDF, another drug pioneered by Gilead.

This move is good for Gilead because of the cost differential between TDF regimens and regimens containing both TDF and emtricitabine. TDF generics in developing countries cost around $57 per patient year, while a combination regimen of TDF and emtricitabine costs around $93. Emtricitabine regimens currently cost too much to be widely accessible for patients in these developing countries.

By taking steps to lower costs for emtricitabine-based regimens, Gilead should profit as patients move to the new drugs that will be more affordable yet still more expensive than TDF. This isn't a financial home run for the company, but I would call it a solid single, especially considering the societal good.

Opponent's error
Unexpected news affecting Gilead came around the same time the company announced the agreements with the Indian partners. Rival Bristol-Myers Squibb (NYSE: BMY  ) suspended its study of a drug BMS-986094, intended to treat hepatitis C, after a patient suffered heart failure.

The immediate impact for Gilead was that its shares shot up more than 8% on the news. The company has a new hepatitis C drug in the pipeline. However, Gilead is further along in clinical trials than Bristol-Myers Squibb with its drug GS-7977. According to a Gilead spokesperson, clinical studies for its hepatitis C drug show that it is "well tolerated and has exhibited a favorable safety profile" thus far.

Others could benefit from Bristol's setback also, though. Abbott Labs (NYSE: ABT  ) has two separate hepatitis C drug trials under way, one of which has already had positive results. Abbott hopes to be able to bring a new hepatitis C regimen to market in 2015.   

Vertex Pharmaceuticals (Nasdaq: VRTX  ) currently markets Incivek, which is approved in the U.S. and Canada for treating adults with genotype 1 hepatitis C, but it also has a drug in development, ALS-2200, similar to the one Bristol temporarily pulled the plug on.

Idenix Pharmaceuticals (Nasdaq: IDIX  ) is also in the game. The company recently announced FDA fast-track approval for its drug, IDX719 intended for treatment of chronic hepatitis C.

Gilead looks to be in the lead for an all-oral hepatitis C regimen, according to some analysts. The stakes are huge, with the global hepatitis therapeutics and vaccines market predicted to increase from $4.7 billion in 2010 to $8.6 billion by 2017.

Down the stretch
The past several days have been good for Gilead. What is the investing outlook for down the stretch?

The stock is relatively cheap right now, with a trailing P/E of 17 and a forward P/E of 13. In comparison, Bristol-Myers Squibb still trades at a forward multiple of nearly 18, even after its bad news.

There is always a high level of risk associated with biopharmaceutical stocks, of course. Gilead could easily have a setback like Bristol did. For now, though, the company appears to be well positioned to score for investors.

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Fool contributor Keith Speights owns no shares in the stocks mentioned above. The Motley Fool owns shares of Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals and Gilead Sciences. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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