3 Reasons to Buy Gilead Sciences, Inc.

Gilead offers investors a compelling growth story in the large-cap pharma space.

Jan 14, 2014 at 6:30PM

Gilead Sciences (NASDAQ:GILD) is one of the hottest names in health care this year, after receiving approval from the U.S. Food and Drug Administration, or FDA, for its game-changing hepatitis C drug Sovaldi. Even though Gilead shares have risen more than 90% in the past year in anticipation of the approval, some experts still see another 50% rise in 2014.

These estimates seem lofty, but could actually be conservative in nature; the stock could outperform the broader market again this year. In my view, Gilead is a rare bird in that it's a large-cap pharma that behaves like a small-cap growth stock. So it offers investors healthy growth with the safety of a well-developed commercial pipeline. Indeed, I think this is the very reason so many fund managers are optimistic about Gilead going forward.

With that said, my view is that there are three compelling reasons to buy Gilead shares now.

Reason No. 1
Sovaldi will probably be a megablockbuster, and it could even be the top-selling drug of all time. Although this is the most oft-cited reason to buy into Gilead now, it's a very good one. During my time covering health care, I've never seen so much confusion over "consensus" on peak sales for a drug. Namely, I've seen consensus estimates of $2.4 billion, $5.4 billion, and even mind-altering numbers in the $13 billion range. Perhaps I'm not an expert on sales projections, but this diversity in estimates appears to defy the Webster's definition of the word "consensus."

Where does the confusion come from? The problem is that Sovaldi may radically alter the hepatitis C landscape. With cure rates topping 90% in clinical trials, Sovaldi may be its own worst enemy. The idea is that it will substantially reduce the size of the hepatitis C market over time, causing sales to drop in the long run.

Complicating matters, AbbVie's (NYSE:ABBV) competing oral-based hepatitis C drug should be approved this year, and it also has cure rates in the high 90% range. Bristol-Myers Squibb (NYSE:BMY) and Merck (NYSE:MRK) also have promising hepatitis C drugs under development that could further exacerbate this problem. Taken together, these new orally administered hepatitis C drugs may lay waste to their own market by doing the unthinkable -- eradicating a disease. Time will tell.

What's key to understand is that Gilead's drug requires fewer pills, targets the most common form of the virus, and, most importantly, is the first to market. Moreover, hepatitis C won't be eradicated overnight, not by a long shot.

So I expect Sovaldi to be a major revenue generator for Gilead for years to come, and it may, in fact, achieve some of the higher consensus estimates floating around in the ether right now. So, stay tuned!

Reason No. 2
Idelalisib could be approved this year as a second-line treatment for chronic lymphocytic leukemia. Last December, Gilead announced that a late-stage trial for idelalisib was stopped early because patients receiving a combo of idelalisib plus rituximab showed a highly significant improvement in overall survival and progression-free survival. With the FDA more willing than ever to speed impressive oncology drugs through the regulatory process, I am cautiously optimistic that idelalisib will be approved in 2014, especially since it targets patients with limited treatment options.

Turning to value creation, idelalisib isn't expected to be a blockbuster as a second-line treatment, but the drug could see peak sales of around $700 million a year. That's certainly nothing to sneeze at, and it's yet another good reason to dig deeper into Gilead's compelling growth story.

Reason No. 3
Looking into the future, Gilead has another potential megablockbuster in development with simtuzumab, which is an experimental treatment for non-alcoholic steatohepatitis, or NASH, that's currently in midstage trials. Last week, we saw just how powerful a potential treatment for this disease could be when Intercept Pharmaceuticals (NASDAQ:ICPT) stopped a midstage trial for its experimental NASH drug early because of overwhelmingly positive results, and the company's shares literally quadrupled in value. While simtuzumab isn't expected to report results until early 2016, and the market could change dramatically by then with the potential approval of Intercept's drug, it shows that Gilead isn't remaining idle in its quest for the next blockbuster drug.

For these reasons, I'm optimistic that Gilead will be a top performer in the sector this year, and that's why I'm making one of my Motley Fool CAPS picks.

Could this stock outperform even Gilead?
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George Budwell owns shares of Bristol-Myers Squibb and Gilead Sciences. The Motley Fool recommends Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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