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Gilead Sciences (NASDAQ:GILD) shares may have rallied 24% this year, but better-than-expected sales and profit have led to analysts ratcheting up their EPS forecasts for next year and that's kept a lid on its valuation. Given that Gilead Sciences' forward P/E is below 10 and its shares are 5% off their June highs, the stock could be the best bargain in biotech.

Moving the needle
Investors have been hesitant to overpay for Gilead Sciences' earnings over fears that competition will cut deeply into its profit, but that fear may be overblown.

Despite facing off against some of the deepest-pocketed biopharmas on the planet, Gilead Sciences has maintained its dominant position as a leader in HIV treatment and success in that indication could mean that rivals will have a hard time dethroning Gilead Sciences in hepatitis C, too.

Across its HIV product line, Gilead Sciences markets a slate of top-selling medications, but its combination therapies are arguably most important and they may be the best signal of Gilead Sciences' future plans in hepatitis C.

By combining market share-leading HIV drugs together into single tablet therapies, Gilead Sciences has cemented itself as the go-to for easy-to-use, effective HIV treatment and, as a result, it markets five different HIV combination medications that will each eclipse the billion-dollar blockbuster threshold this year.

Gilead Sciences is following a similar combination therapy blueprint in hepatitis C.

Last fall, Gilead Sciences followed up its massively successful launch of Sovaldi in December 2013 with the launch of Harvoni, a combination of Sovaldi and ledipasvir, which has gone on to become the most widely prescribed hepatitis C genotype 1 drug, with $3.6 billion in sales last quarter.

Gilead Sciences could soon follow up Harvoni with yet another combination therapy for use in non-genotype 1 patients that could be similarly successful. Gilead Sciences plans to release data from phase 3 trials this quarter evaluating the combination of Sovaldi and its newly crafted velpatasvir, formerly known as GS-5816. In phase 2, 88% to 100% of patients -- depending on genotype and the level of cirrhosis -- treated with this couplet achieved a functional cure in 12 weeks.

If Gilead Sciences phase 3 data backs up its phase 2 findings, then the company could apply for and receive FDA approval for this combination as soon as next year.

Gilead Sciences is also conducting mid-stage trials of another combination therapy that includes Sovaldi, velpatasvir, and GS-9857 as a next-generation hepatitis C treatment that could reduce treatment duration to six weeks from its current eight to 12 weeks. If that drug combination succeeds, then it could entrench the company's dominance in hepatitis C for years to come.

Steady as she goes
Last year, the launch of new hepatitis C drugs allowed Gilead Sciences to more than double its sales to $24.9 billion and sales momentum has continued through the first six months of this year. Despite facing new competition from AbbVie's Viekira Pak, a genotype 1 drug launched in January, Gilead Sciences revenue grew 26% to $8.2 billion in the second quarter, bringing its revenue through the first six months of this year to $15.8 billion, up 40.3% from the same period in 2014.

Importantly, leveraging sales growth against fixed costs continues to support bottom-line profitability that's building a bulletproof balance sheet while also funding share buybacks and dividend payments.

Last quarter, EPS totaled $3.15, up 33% from 2014 and socking away some of that profit for a rainy day led to its cash stockpile increasing to $14.67 billion from $11.7 billion exiting 2014. The jump in profit also allowed Gilead Sciences to buy back $900 million in shares and pay a $0.43-per-share dividend last quarter -- its first ever.

Looking ahead
A global population of hepatitis C patients that's north of 150 million people means there's a significant need for treatment that's worth billions of dollars to drugmakers. Hopes of capturing some of that massive market means that Gilead Sciences hepatitis C program won't remain unchallenged by competitors. However, Gilead Sciences' pipeline suggests that it has plenty of candidates in the wings that it can launch to blunt that risk, and if so, then paying 9.9 times forward EPS to buy shares would seem to be a good deal for long-term investors. 

 

Todd Campbell owns shares of Gilead Sciences. Todd owns the equity research firm E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool recommends and 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.