Shares in Gilead Sciences (NASDAQ:GILD) have moved significantly higher in the past year as investor enthusiasm surrounding its next-generation hepatitis C drugs has swelled. That enthusiasm, however, may soon get dented by a competitive threat from AbbVie (NYSE:ABBV), the global drug powerhouse behind the top-selling autoimmune drug Humira. AbbVie's plans to roll out its own hepatitis C drug cocktail soon could mean that it will win away billions of dollars in market share from Gilead Sciences next year. While that could mean less revenue for Gilead Sciences, I'm not willing to bet against the company for these three reasons.
1. Envy-inspiring product lineup
Few drugmakers offer as robust a drug franchise as Gilead Sciences. The company is the market share leading maker of HIV therapies, and those therapies are on target to deliver more than $10 billion in sales this year. Gilead Sciences shored up its HIV franchise years ago by ushering along a slate of multi-drug combination therapies designed to reduce the pill burden on HIV patients, and none has been more successful than Atripla, which combines Gilead Sciences' Viread and Emtriva with Merck's Sustiva and has generated $2.5 billion in sales through the first nine months of this year. In addition to Atripla, Gilead Sciences also markets the fast-growing combination therapies Complera and Stribild. Sales of Complera and Stribild are up 61% and 142% year over year through the first three quarters of this year, and both are on pace to eclipse $1 billion in sales this year.
Gilead Sciences' HIV products offer plenty of shareholder friendly cash flow, but it's the company's hepatitis C drugs, Sovaldi and Harvoni, that are getting most of the attention this year. Sovaldi has generated more than $8.5 billion in sales through September; the FDA's approval of Harvoni in October has many analysts estimating that it will post similar numbers next year.
Despite the potential competition from AbbVie, Harvoni is likely to remain the most widely prescribed medicine for hepatitis C. Harvoni eliminates the side-effect laden, prior-generation drugs peginterferon and ribavirin, while some of AbbVie's patients may still need to take ribavirin. Additionally, Harvoni offers an arguably better dosing schedule (one pill daily rather than three pills daily) and a shorter treatment period for some (as little as eight weeks versus 12 weeks for AbbVie's cocktail). As a result, many doctors may stick to prescribing Harvoni.
In addition to Gilead Sciences HIV and hepatitis C drugs, the company also markets two cardiovascular therapies. The first is Letairis, which is used to treat pulmonary arterial hypertension and posted sales of $146 million last quarter; and the second is Ranexa, which is used to treat chronic chest pain and had sales of $132 million in the third quarter.
2. Plenty of pipeline promise
In addition to its compelling products, Gilead Sciences research and development department is working on a host of intriguing therapies that could support future revenue growth.
One of the company's recent successes is tenofovir alafenamide, or TAF, a new formulation of the company's top selling Viread that could reduce risks of kidney toxicity. TAF not only offers patients a better safety profile, but gives Gilead more patent protection because Viread was set to lose patent protection in 2018, but TAF has patent protection until at least 2022.
Gilead Sciences is also researching the next generation of hepatitis C drugs, including a combination of Sovaldi and GS-5816 that aims to offer high cure rates across even the toughest to cure hepatitis C genotypes. Additionally, Gilead Sciences is researching drugs that address cancer and cardiovascular disease.
3. Rock-solid financials
Thanks to strong sales of its HIV and hepatitis C drugs, Gilead Sciences is in a very strong financial position. The company's total current assets (cash and cash-like) total $12.5 billion in Q3, up from $7.27 billion last December. Since the company's short-term liabilities are smaller than its current assets, it has plenty of firepower to invest back into research or make acquisitions.
Gilead Sciences' balance sheet is likely to improve even more in 2015 as sales continue to fuel cash, but that's not the only reason to avoid shorting shares. The company is also arguably inexpensive. Analysts estimate that Gilead Sciences will earn $10.06 per share next year, up 27% from 2014, and that means the company's forward price to earnings ratio is just 10.5. Shares also appear attractive based on a PEG ratio, which takes into consideration price, earnings, and earnings growth, of just 0.53. Typically, ratios below one are considered to be attractive.
Taking the long view
Investors should be particularly cautious of shorting stocks simply because they are near new highs or because of perceived competitive risks. Even the best companies will face obstacles, and Gilead Sciences isn't an exception, but great companies often find ways to overcome those inevitable hurdles. Since Gilead Sciences doesn't rely solely on its hepatitis C drugs, where AbbVie will make its challenge, and the company boasts a solid pipeline, and is on solid financial footing, long-term investors may find that it makes sense to give the company the benefit of the doubt, rather than bet on it failing.
Todd Campbell owns shares of Gilead Sciences. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.