Gilead's Got Cash Up to the Gills

Gilead Sciences (NASDAQ:GILD) celebrated its ninth straight quarter of beating analyst estimates, trouncing its year-ago results even after the newly added expensing of stock-based compensation costs. Diluted EPS rose 61.7% to $0.55, compared to the $0.34 in the first quarter of 2005. I also calculated -- for your convenience -- a 73.5% increase in diluted EPS without stock-based compensation costs of $0.04 per diluted share.

The 61% increase in revenues was driven by high demand for the company's products. The 50% increase in HIV product sales resulted from a 173% increase in sales of Truvada, a combination of two of the company's other antiretroviral drugs, Emtriva and Viread. Truvada may continue to win market share in light of a recent study establishing it as a stronger drug than Combivir, GlaxoSmithKline's (NYSE:GSK) anti-HIV drug. So far, 20% of patients taking Combivir have switched to Truvada.

Royalties from Roche for sales of Tamiflu, a drug used for flu prevention and treatment, increased to $115.3 million from $11.9 million in Q1 of 2005. Fear that the avian flu may mutate into an airborne human pandemic has governments around the world stockpiling vaccines and other drugs. The probability that the mutations necessary to alter the virus will occur remains very low, which means that the company could continue to benefit from flu-preparedness programs for several more years. Glaxo competes with Gilead in this space as well, with its recently approved Relenza.

The main problem I see here is the rather thin pipeline. That could change quickly if the $2.54 billion in cash and cash equivalents is used for an acquisition or two. In yesterday's conference call, management indicated that it had indeed been spending considerable time looking into public and private companies. With current products in such high demand, Gilead does not need to rush into any deals; it can wait for the right opportunity. The only bet it has made recently was a $25 million investment in Corus Pharma, a privately held firm with a Phase 3 antibiotic for cystic fibrosis. The $233 million market it seeks to penetrate currently includes Chiron's (NASDAQ:CHIR) TOBI and Genentech's (NYSE:DNA) Pulmozyme.

Gilead's strong performance means that investors have to pay a slight premium for its shares. However, with a huge hoard of cash being prepared for use, and the recent positive trends (which show no signs of letting up), Gilead may be on the verge of a sustained high growth rate. In hindsight, that scenario could turn a slightly overvalued stock into a bargain.

Other fowl-ish Foolishness:

• Glaxo's new flu-fighting ammo.
• The avian flu is certainly ruffling some feathers.
• Chiron's isn't sick, but it still got a booster shot.

GlaxoSmithKline is a Motley Fool Income Investor recommendation.

Fool contributor John Bluis does not own shares of any company mentioned in this article. The Motley Fool is investors writing for investors .