Source: Flickr user Sergei Golyshev.
If you think you've done well since the stock market hit its lows more than five years ago, Gilead Sciences (GILD 1.06%) shareholders would love to have a word, even despite the stock's recent slip.
Shares of biotech behemoth Gilead have rocketed higher by more than 400% since March 2009 (that's double the return of the S&P 500) as the company has benefited from strong sales of existing drugs and the introduction of three new therapies -- Harvoni, Sovaldi, and Stribild -- that look poised to drive sales growth for at least the next decade.
Sovaldi is the company's revolutionary oral hepatitis C pill that can be given to genotype 2 & 3 patients without the need for interferon (which often comes with unpleasant flu-like side effects), while Harvoni is a cocktail drug comprised of Sovaldi and ledipasvir and is a treatment for genotype 1 HCV patients. Harvoni is a step forward in that it can be administered without the need for interferon or a ribavirin, and in some instances patients can see curative benefits in as little as eight weeks. Finally, Stribild is Gilead's next-generation four-in-one HIV-1 therapy -- that's its long-term solution to replacing Atripla.
An investor only needs to look at Gilead's recent sales history to see that the company is firing on all cylinders. In the third quarter, for example, total revenue more than doubled to $6.04 billion from $2.78 billion in the prior-year period, while adjusted net income more than tripled to $3.01 billion from $0.88 billion in the year prior.
However, pointing at these drugs and saying they're the causes of Gilead's success only scratches the tip of the iceberg. There are a number of other reasons (in addition to Harvoni, Sovaldi, and Stribild) that explain why Gilead is so wildly successful.
1. Everything is developed in house
To begin with, and this is an important point that many investors take for granted, everything that Gilead Sciences is developing is in house. To be clear, Gilead is testing Sovaldi with other HCV medicines in select clinical trials, but when it comes to Sovaldi, Harvoni, and Stibild, we're talking about drugs made entirely in house by Gilead (after buying Pharmasset in 2011 for Sovaldi). What that means is that Gilead is able to keep more revenue for itself, which in turn can boost its gross margin well above that of its peers.
Sovaldi pill. Source: Gilead Sciences.
This is especially important for HIV medicine Stribild. Atripla, which Stribild was designed to replace, was a combination drug made of three components, each coming from a different pharmaceutical company. For Gilead it meant having to split its revenue three ways. Now, with all four components of Stribild coming from Gilead, the company is able to keep 100% of the revenue generated and is able to actually benefit as Atripla is phased out in favor of Stribild.
2. Gilead's pricing power is unmatched
Another point worth noting is that Gilead is wildly successful because it has exceptional drug pricing power. Part of this has to do with the fact that it's delivering first-in-class products, and first-in-class products are going to merit some type of expected price premium. An HCV pill that can be easily administered and deliver 90% or higher cure rates is going to command a hefty price tag, as is a four-in-one advanced HIV pill.
Source: Gilead Sciences.
However, the other side to pricing power that investors should understand is that insurers and pharmacy-benefits managers often accept drug developers' pricing without contest. Although we have heard rumblings that a few PBMs could consider removing Sovaldi from the approved medicines list due to its $84,000 12-week treatment price tag ($1,000 per pill), the reality is that few drugs are ever removed from insurers' approved drug lists as either few alternatives exist or there is a risk that policy holders could potentially become dissatisfied by their inability to get a specific treatment. If this were to happen it's possible that it could cause a furor of negative public opinion against the insurer or PBM. It's really a fine line that insurers and PBMs have to walk, so generally speaking they play it safe and accept drug developers' prices.
3. Gilead focuses on chronic and global diseases
Lastly, don't overlook the fact that Gilead's three growth drivers (Harvoni, Sovaldi, and Stribild) have a wide patient pool that spans the globe.
As noted in Gilead's third-quarter report, Sovaldi had been administered to "just" 117,000 people year-to-date. In total, the World Health Organization estimates that 180 million people worldwide are HCV positive. Worse yet, most don't know they have the disease. What this means is potentially a decade or longer of impressive HCV revenue generation for Gilead's HCV drugs since they're dealing with such a wide moat of possible patients around the globe.
Steady as she goes
Together these factors would imply that Gilead's future still looks bright; even after its recent drop the stock has gained better than 400% in five years. A forward P/E of just 10 and a projected growth rate that could easily stay in the double-digits add to my belief that shares may still be a bargain, even here.
