We've all seen it before: a man slips from a high balcony, slowly tumbling to his hopeless fate... until Spider-Man swings out of nowhere and saves the day. We all love those superhero stories, and for good reason. Even more importantly here at the Fool, the same characteristics that make Spider-Man (or Batman) so successful can make entire companies huge successes, too.
With this in mind, we ran an unconventional screen. We looked for companies with that "sixth sense" (a management track record of anticipating issues and leveraging itself well); incredible strength and leaping ability (a company with a great product but a lot of pop left for the share price); and a brilliant scientific brain (some of the best R&D programs out there.) Just for kicks, go ahead and make it a company that specializes in saving lives, too. And that's how we found Gilead Sciences (GILD +0.42%).
Competitive advantage: The industry leader in HIV
Two products generated 70% of Gilead's $9.7 billion of 2012 revenue. Truvada, a combination treatment for HIV, earned $3.18 billion, while Atripla -- which combines Truvada with Sustiva, a supplement manufactured by Bristol-Myers Squibb (BMY +0.22%) -- netted another $3.58 billion. It's safe to say that those two HIV treatments are the backbone for Gilead's success. Why?
From Gilead's point of view, the treatments contain the same two drugs: Viread and Emtriva. Neither faces patent expiration until 2018 , and by all perceivable measures they're two of the best on the market. Although neither is recommended to be taken alone (hence, the combination treatments), Viread is listed as a preferred treatment within its "type" by the FDA and with good reason. Gilead's treatments are more effective -- and come with fewer side effects -- than competitor products, which helps explain why Gilead has grown its patient total from 500,000 (68% market share) to 679,000 (82%) since 2007.
With such strong products, incredible market share, and a growing market (the branded HIV market is expected to expand until 2016, and remain flat at that point until 2018), the lifeblood of Gilead should continue to produce strong results. Its biggest competitive threat is Tivicay, a byproduct of a joint-venture primarily owned by GlaxoSmithKline (GSK 1.64%). Tivicay has been superior to Atripla in clinical trials and similar to Gilead's up-and-coming treatment Stribild. Additionally, Tivicay is being heralded as a "cheaper" option than Stribild.
However, there are three things to keep in mind. First, Stribild offers all of the HIV treatments in one pill, which drastically improves convenience -- and sometimes, effect. Second, because Tivicay requires supplements to treat HIV, its price might actually be higher than Gilead's at the end of the day. Finally, as mentioned before, the market is growing. Tivicay will very likely occupy the market of patients that Stribild is not approved to treat (already treated patients and children) -- in other words, there's plenty of room for both.
Growth market
Gilead received some good (but perhaps unsurprising) news recently regarding both FDA approval and phase 3 results for its new drug Sovaldi, which treats hepatitis C. The market for treating hepatitis C is expected to exceed $20 billion eventually, and Gilead is in prime position to capitalize.
Gilead, along with competitor AbbVie (ABBV 2.51%), stands atop the totem pole in terms of treatment effects. Gilead possesses one key advantage, however: Instead of requiring up to six oral supplements per day, Gilead's Sovaldi requires just one. Since patients are more likely to follow their Sovaldi prescription well, it will then be more convenient and consequently should command higher pricing power.
Express Scripts' chief medical officer Steven Miller did express concern over Gilead's estimated price point, indicating that it might be somewhat high. On the flip side, since only AbbVie can really challenge Gilead in the market, Gilead should be able to establish a favorable price. Additionally, Sovaldi is the clear leader in treating certain genotypes and should be the first to market; both of these factors might force pharmacy benefit managers to accept it. Regardless, in a market that could eventually exceed $20 billion, Gilead should find plenty of opportunities to explode sales.
Management edge
It's hard to say which management decision has been the most impressive. One of Gilead's biggest threat actually stems from Bristol-Myers Squibb. Sustiva, that third component of Atripla, lost its EU patent in 2013 and will lose its U.S. patent in 2015. Although some patients could switch to a combination of Truvada and generic Sustiva, others will likely cut ties with Gilead or only purchase Viread (which has a stronger competitive advantage than Emtriva).
Anticipating this development, the company developed Complera and Stribild to fill the void. Although Complera has only managed to grow to $210 million (despite a longer time frame), Stribild looks like a promising fix, exploding sales from $17 million (in the third quarter of 2012) to $144 million (in the third quarter of 2013).
Gilead also acquired Pharmasset for $11 billion, helping the company to expand its product offering and acquire the rights to develop Sovaldi. This makes the acquisition look like a true steal. It acquired Emtriva, one of two elements of its key Truvada treatment, in 2003, and developed the blockbuster Viread on its own. This mix of ability to identify key growth opportunities, make strategic acquisition, and develop its own pipeline bodes well for a company that will eventually face patent headwinds in 2018.
Takeaway
Gilead may never get bitten by a radioactive spider, but it sure looks like a superhero for investors. Although its huge jump (from around $25 to begin 2012 to almost $75 now), that's what happens when you start swinging from building to building. There's always a risk involved, but things usually seem to work out for Spider-Man.
