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Best Biotech to Buy Now?

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April 07, 2014 – Comments (0) | RELATED TICKERS: GILD

Board: Value Hounds

Author: LeKitKat

[See Post for Tables]

Gilead is very much a virus specialist—first HIV now hepatitis C. HIV is an excellent business since it treats a chronic disease requiring ongoing treatment for the life of the patient. Even though new cases of aids have fallen off the years, the demand for the drug remained intact from the surviving base.

New drugs for Hepatitis C are curing the disease with no viral loads detected by the end of treatment in more than 90% of patients in some trials. Once the patient has been treated the medication is discontinued.

It makes sense that a company successful in taking on HIV would have the tools to crack the treatment of Hepatitis C. Both are
retroviruses and drugs that use similar strategies can be built on from prior successful strategies. Gilead acquired its newest HCV drug by merging with Pharmasset.

Retroviruses have a unique system for getting into the cell and using the cell’s natural resources for their replication. HIV is a slightly stupid virus because it eventually kills the host although transmission through sexual contact is a brilliant way to ensure it gets passed from host to host. HCV is slightly smarter and coexists for decades in most cases before becoming deadly in a percentage of infected patients. HCV has proved to be curable and HIV is treatable without cure becoming chronic but not as deadly.

Short crash course in virology –too much information but lays the groundwork for understanding what Gilead targets and why they have been successful

Terms:

•DNA: DNA is like the "blueprint" for building living cells.

•Enzymes: Enzymes are like the workers of a cell. They build new proteins, transport materials around the cell, and carry out other important cellular functions.

•RNA: RNA is like the construction boss. Cells use RNA to tell enzymes how to build a specific part of a cell. To make a new protein, enzymes will copy a specific part of the DNA into a piece of RNA. This RNA is then used by other enzymes to build a new protein or enzyme.

•Proteins: The building blocks that are used to make living things.

•Nucleus: A small package inside the cell where the genetic material is kept.

We vulnerable humans have DNA in our cell’s nucleus that codes for proteins making life possible. HIV and HCV have the “opposite” or reverse of DNA called RNA. A retrovirus’s biggest job is to get the RNA translated into DNA and then have the DNA inserted into the host cells DNA to make sure it gets copied and made into alien viral proteins necessary for life.

Retroviruses have two distinguishing features. These viruses have a lipid (fats) envelope surrounding their shell and it makes them vulnerable to anything that dissolves oils--- detergents or alcohol. HIV can be easily killed by washing your hands.

Secondly, because of the way they replicate their coded information, they have several key enzymes (workers) that are required to copy then insert the viral code into the cells DNA. These alien codes create the new baby virus. Hardworking viral enzymes include reverse transcriptase and integrase. Viral medications target these workers for disruption, stopping them from completing their jobs. Once disrupted the coded copies aren’t completed and inserted into host DNA and the virus is stopped dead in its tracks with its vision of world domination crushed.

Overview of how viruses attack cells and drugs attack viruses

In order for retroviruses to commandeer an immune cell’s DNA for its own evil ends, it must take its own protein blueprint (RNA) and convert it to DNA that’s compatible with the host cell’s DNA. This is a key step and potential weakness that is exploited by antiviral medications. The retrovirus’s (HIV, HCV) RNA is converted into DNA by the reverse transcriptase enzyme that can be blocked two ways. A drug can provide the wrong building blocks creating unusable DNA or it can directly block the enzyme preventing it from building DNA at all. Sovaldi and Viread provide faulty building blocks creating unusable DNA. The lengthening strands of DNA that viral reverse transcriptase is trying to make will be filled with errors and completely useless.

After the reverse transcription of RNA into DNA is complete, that DNA must then be integrated into the human cell's DNA by a viral integrase enzyme. Integrase cunningly hides the newly minted viral DNA inside the cell’s own DNA, where it will be unwittingly copied helping give birth to bouncing baby viruses. This gives Gilead another point of attack and Stribild contains elvitegravir -- an integrase inhibitor. Integrase inhibitors offer an alternative therapy to patients who have developed resistance to drugs that target reverse transcriptase and protease.

The last steps involved are using the newly printed viral DNA as a template to make the structural working parts of the virus. The DNA is read by transcriptase (another area of research for drugs—no Gilead transcriptase inhibitors approved). The reading provides a map for building the actual viral protein and the proteins are assembled into the virus by proteases. Gilead’s Vitekta is a protease inhibitor.
Clearly, Gilead has been successful at creating and bringing drugs to market that target several key points in the viral life cycle. This is important since especially in HIV, it’s important to use combination therapy to effectively stop the virus.

The pricing and politics around Hepatitis C makes Gilead an interesting company with some ethical issues — how much should a company charge for a lifesaving drug? Gilead’s business has always HIV-centric and they still make most of their revenue on HIV drugs, but Hepatitis C should offer opportunities for growth.


• Atripla is an oral formulation dosed once a day for HIV. Atripla is the first once-daily single tablet regimen for HIV intended as a stand-alone therapy or in combination with other antiretrovirals. It’s a fixed-dose combination of Viread and Emtriva and Bristol Myers non-nucleoside reverse transcriptase inhibitor, Sustiva. Gilead doesn’t have non-nucleoside inhibitors of its own.

• Truvada is an oral med dosed once a day as part of combination therapy to treat HIV in adults. It’s a combination of Viread and Emtriva. In 2012, the FDA also approved Truvada to reduce the risk of sexually acquired HIV in high-risk adults -- exposure prophylaxis. This is a big deal for Gilead as it expands FDA approved indications for their drug increasing sales.

HIV was a death sentence back in the 1980’s and early 1990’s but has now become more of a manageable chronic disease. Dosing schedules were onerous and nearly impossible to comply with for patients and once a day dosing is nothing short of miraculous.

They have other HIV drugs approaching a billion dollar sales including Complera/Eviplera and Viread.

The HIV franchise is solid and patents are good for Atripla and Truvada until 2021 in the US and 2018 in the EU. There will be a patent dispute in Canada going to court in 2015. There is a fair amount of competition and that was always a concern for me since they rely so heavily on HIV drugs. So far that hasn’t been a problem over the past few years but in 2013, revenue growth slowed for Truvada and Atripla. Total revenue grew 15% even without much help from its two biggest sellers.


In 2013, Atripla revenue only increased 2% and Truvada sales were down 1%. Complera/Eviplera and Stribild are taking up the slack growing 137% and 837% respectively.

• Stribild is an oral formulation dosed once a day for the treatment of HIV-1 infection in treatment-naive adults. Stribild is GILD’s third complete single regimen for the treatment of HIV and is a fixed-dose combination of their antiretroviral medications, Vitekta, Tybost, Viread and Emtriva (emtricitabine). Stribild was approved by the FDA in August 2012 and the EMA in May 2013.

Stribild is a combination of four drugs—three of the medications inhibit the HIV virus on a transcription/integration level and one boosts the bioavailability of the drug. The attack on HIV comes from different directions making Stribild very effective.

• Complera/Eviplera is an oral formulation dosed once a day for the treatment of HIV-1 infection in adults. The product, marketed in the United States as Complera and in Europe as Eviplera, is the second complete single tablet regimen for the treatment of HIV and is a fixed-dose combination of Viread and Emtriva, and Janssen's non-nucleoside reverse transcriptase inhibitor, Edurant (Gilead doesn’t have its own).

Viread and Emtriva are both in Stribild-- a newer drug. They work by interfering with the viral reverse transcriptase. Competition is formidable in HIV research and marketing and the slowing sales for Atripla and Truvada in 2013 are evidence of that. There are branded treatments competing for space and recently there is ever-increasing competition from generics. HIV treatment continues to evolve and become more elegant and less cumbersome for the patient. HIV drugs abound with more coming to market. Of the 37 branded HIV drugs available in the United States, Gilead products compete with the fixed-dose combination products in the nucleotide/nucleoside reverse transcriptase inhibitors including

•Combivir (lamivudine/zidovudine)—Pfizer/Glaxo/ViiV

•Epzicom/Kivexa (abacavir/lamivudine) and Trizivir (abacavir/lamivudine/zidovudine)— Pfizer/Glaxo/ViiV

These products compete with Stribild, Complera/Eviplera, Atripla and Truvada.

•For Tybost, they compete with ritonavir, marketed by AbbVie.

•Glaxo/Pfizer as ViiV saw approval for Tivicay (dolutegravir), an integrase inhibitor, launched in the fourth quarter of 2013. Stribild has an integrase inhibitor as one of its component drugs.

Gilead’s Stribild and Complera look good with strong sales growth and revenue approaching the blockbuster club of a $billion in sales in 2013.

Patent angst

Patent expirations are complex and muddied by companies like Teva that aggressively challenge patents in court and hope to launch generic equivalents sooner than the patent expirations we find in the filings.
As always there are generic manufacturers submitting ANDAs on a few of Gilead’s big sellers and if they win the suits, the patents will expire sooner. Under attack of most interest:

Truvada and Viread under attack from Teva

Teva and Gilead settled on Viread and Teva will launch a generic in 2017. Viread is a $960 million drug and the loss will be painful but not a deathblow. Teva and Gilead are going to court over the Canadian rights to Truvada and Atripla in January 2015. Truvada is worth $3,136 million globally and losing Canada wouldn’t the end of Gilead. Should Teva win and feel a case for global challenge was made, then Teva would launch another legal attack that would be more devastating to lose. Atripla makes $3,638 in revenue annually and the same scenario goes for this drug—Canadian challenge not crippling but setting a precedent for global rights would be. These are Gilead’s two biggest sellers and the damage to the company would be catastrophic if they lose the 2021 patent rights.

Ranexa ($450 million) is being contested by Lupin and may go generic in 2019.

Hepatitis C

Hepatitis C or HCV is a chronic liver disease that can eventually lead to liver failure and liver cancer. It can be silent for years before becoming symptomatic. There are an estimated 3-5 million infected in the US and 170 million globally. It’s a big market and the interest in bringing new drugs to market is high. Treatment is complicated by the number of genotypes that respond differently to individual medications. There are at least 6 types of HCV.

Some facts about Hepatitis C

•60-70% of infected individuals do not have symptoms but can still transmit the virus to others.

•70-85% of infected people develop chronic hepatitis C.

•15-25% of persons infected eliminate HCV from their blood without any treatment.

•60-70% of those with HCV infection develop chronic liver disease.

•1-5% of people infected with HCV will die from liver cancer or cirrhosis.

•Chronic HCV infection is the leading reason for liver transplants in the Unites States.

•There are 6 HCV genotypes (genotypes 1-6) and more than 50 subtypes. Genotype 1 is the most common HCV genotype in the United States.

The standard of care initially was pegylated interferon and ribavirin that later expanded to a triple combination with Incivek (Vertex) or Victrelis (Merck) when they came to market. This did a lot for the sale of Victrelis in 2012 but by 2013 competition was heating up and Merck sales were off 15%. Incivek sales are going down even faster and down 60% in 2013 compared to 2012. Competition hurts and the protease inhibitors with lower response rates have been supplanted by newer more effective drugs including Sovaldi from Gilead.

The cure rate for interferon/ribavirin

HCV Genotype 1: 40-50% cure rate at 12 months
HCV Genotype 2-4: 70-80% cure rate at 6 months

The combined treatment is hampered by debilitating side effects including fatigue, depression, irritability and nausea – interferon is especially notorious for causing severe flu-like symptoms that would make taking a 48-week course nearly intolerable. Newer drugs, sofosbuvir (Sovald) and simeprevir (Olysio Janssen/JNJ), are approved for use with interferon and ribavirin for treatment of genotype 1 infection. Sovaldi can be used without injected interferon to treat HCV genotypes 2 and 3 — about a quarter of all hepatitis C patients in this country.

Sovaldi was approved in early December 2013 and according to the Gilead 10K sales were $140 million. Tracking in January show 2,488 prescriptions written in just one week when 882 had been estimated. It’s beating Victrelis and Incivek scrips by 2.4x. Analysts are translating these numbers into $1.3 billion for just Q1 2014. This is an amazing uptake of a new drug. Gilead could do as much as $5 billion for 2014 if the sales trend continues. The bad news is there may be pushback on the price from insurance and that has investors uneasy.

Sovaldi is extremely effective. The prior standard-of-care, Vertex Pharmaceuticals’ Incivek (telaprevir), when added to interferon and ribavirin produced a sustained viral response of around 80% in naïve patients with HCV genotype I.

In genotype 1 and 4 patients where Sovaldi is indicated for use with interferon/ribavirin, the overall response rate was 90% with a high of 92% for type Ia and 96% for type 4. Sovaldi is used with ribavirin only in Types 2 and 3 with genotype 2 achieving SVRR rates in excess of 90%. Genotype 3 is harder to treat and has rates around 60% at 12 weeks and improves to 92-93% at 24 weeks in treatment naïve patients. Genotype 2 has 90%+ rates at just 12 weeks in treatment naïve groups.
Gilead’s new all oral HCV regimen — a single pill containing Sovaldi and second drug, ledipasvir should receive FDA approval later this year. The cure rate may be even higher and eliminate the side effects from ribavirin and interferon.

Results for Sovaldi/ledipasvir

The intent-to-treat SVR12 rates observed to date in the ION studies are summarized in the table below. Results of the 24-week arms from ION-1 will be available in the first quarter of 2014 and will be presented at a future scientific meeting.

Of the 1,518 patients randomized to the 12-week arms of ION-1 and to all arms of ION-2 and ION-3, 1,456 patients (95.9 percent) achieved the primary efficacy endpoint of SVR12. Of the 62 patients (4.1 percent) who failed to achieve SVR12, 36 patients (2.4 percent) experienced virologic failure: 35 due to relapse and only one patient due to on-treatment breakthrough (with documented non-compliance). Twenty-six patients (1.7 percent) were lost to follow-up or withdrew consent.

Fewer adverse events were observed in the RBV-free, fixed-dose combination arms compared to the RBV-containing arms in all ION studies. Adverse events observed in those taking the SOF/LDV tablet were generally mild and included fatigue and headache. In the RBV-containing arms of the ION studies, the most common adverse events were fatigue, headache, nausea and insomnia. Anemia, which is a common side effect associated with RBV, was reported in 0.5 percent of patients in the SOF/LDV arms versus 9.2 percent of patients in the RBV-containing arms. Less than 1 percent of patients in the studies discontinued treatment due to treatment-emergent adverse events.

In development

protease inhibitors

Asunaprevir a protease inhibitor has in vitro activity against HCV genotypes 1 and 4. When dosed at 600?mg twice a day and given in combination with PEG and RBV to treatment-naive genotype 1 patients, eRVR was achieved in 75% of patients vs. 0% of those given PEG+RBV alone, and SVR was achieved in 83% of patients vs. 46% in the PEG+RBV arm. It’s hepatotoxic at effective doses.

Faldaprevir protease inhibitor Boehringer. SVR rates on triple therapy with certain genotypes were up to 95%.

MK-5172 is an NS3/4A protease inhibitor from Merck with broad activity across multiple HCV genotypes and clinically important resistance variants; it is currently in phase II trials. Among those patients who received 100?mg a day, 91% of patients had undetectable RNA at week 4. Ninety percent of these patients achieved SVR24. Genotype 1a patients had lower SVRs of 81–90% and genotype 1b infection had 92–100% SVRs.

Immediate big threat from AbbVie

http://www.aidsmeds.com/articles/AbbVie_3D_1667_25244.shtml

AbbVie’s investigational triple-combination therapy cured close to 100 percent of people with genotype 1b of hepatitis C virus (HCV) in a large Phase III trial. ??The results position AbbVie in a competitive position against Gilead Sciences’ combination pill of Sovaldi (sofosbuvir) and its investigational drug ledipasvir, which has had similarly stellar results in clinical trials.

The AbbVie trial included 419 participants who received 12 weeks, with or without ribavirin, of the so-called “three-D” therapy: the ritonavir-boosted protease inhibitor ABT-450/r (a coformulated pill of the two drugs), the NS5A inhibitor ABT-267 and the non-nucleoside NS5B inhibitor ABT-333. ?

?A total of 99.5 percent of those who took ribavirin and 99 percent of those who did not achieved a sustained virologic response 12 weeks after completing therapy (SVR12, considered a cure). The researchers concluded that ribavirin offered no treatment advantage. ?

Other contenders

Daclatasvir was the first NS5A inhibitor investigated in clinical trials and belongs to BMY. In vitro, daclatasvir exhibited high antiviral activity against all HCV genotypes. In phase I studies, monotherapy resulted in a sharp initial decline in HCV RNA; it was found to have low resistance to genetic variants. The most common resistant variants were seen in genotype 1a patients, and few were seen in genotype 1b patients. No cross-resistance between daclatasvir and other DAAs has been reported, making it desirable for use in an IFN-free DAA regimen. Ledipasvir is Gilead’s NS5A inhibitor.

NS5A inhibitors are one of the most recent avenues of research and could become key HCV drugs. They are molecules that target the HCV-encoded non-enzymatic NS5A protein. NS5A is essential for HCV propagation and, although its actual functions are largely unknown, it is likely a key regulator of viral replication and assembly. The protein is exquisitely sensitive to small molecule mediated inhibition. NS5A-targeting molecules are probably the most potent antiviral molecules ever discovered and exhibit a number of other attractive drug-like properties, including activity against many HCV genotypes/subtypes and once-daily dosing potential.

Then there are nucleoside/nucleotide polymerase inhibitors (Sovaldi is one) and NNPIs (less potent/one genotype) for at least 5 more drugs in trials.

HCV is a hotbed of research activity and some of the ones listed above show promising results with SVRs in the 90%+ range and all of them if brought to market represent competition. Just as Incivek and Victrelis fell off the map, Sovaldi may suffer the same fate if a newer, better, side effect free medication comes to market. For now Sovaldi’s future is bright as is Ledipasvir and Gilead is looking to extend its reach into oral combinations regimens that will circumvent the interferon/ribavirin side effects.

Gilead is involved in other areas of drugs and drug development but none is as big as viral medications. They have a small presence in cardiovascular, respiratory, ophthalmologic, other infectious disease drugs and research. These account for only 13% of revenue.

Pipeline

Gilead has an extensive pipeline making a good candidate to survive decelerating revenue across some of their HIV drugs.

Pending market applications

These will be the closest candidates for approval.

•Cobicistat—another drug enhancer along the lines of Tybost for HIV. Not much blockbuster potential

•Elvitegravir—for HIV already approved as part of Stribild assuming they are going for monotherapy for this drug alone

•Combination lepidasvir and sofosbuvir for oral treatment of HCV with ribavirin

•Idelaisib—for non-Hodgkins lymphoma and chronic lymphocytic leukemia & may rival the immensely successful Rituxan

There are five drugs in phase 3 for HIV, HBV, myelofibrosis, diabetes, and chronic angina. These could be 1-2 years away from approval.
Phase 2 and phase 1 drugs are a long way out and more likely to fail before getting to market. There are around 17 of these with five candidates for HCV and HBV. Gilead has a fairly promising list of drugs in development they give the company welcome diversification away from Truvada and Atripla. The patent expiration schedule gives them time to get new drugs ramped up

Results for 2013

Total revenues increased 15% to $11.20 billion in 2013. Total product sales were $10.80 billion (the rest are royalties), an increase of 15% over $9.40 billion in 2012, driven primarily by the accelerating sales of Stribild and Complera/Eviplera.

Cardiovascular drugs Letairis and Ranexa, increased 24% to $968.6 million in 2013 and while cardiovascular is only 9% of product revenue, it’s growing faster than Atripla and Truvada.

US sales were up 20% at $6.65 billion driven by sales growth of Stribild and Complera and the launch of Sovaldi.

Sales tend to be somewhat “seasonal” and in q4 2013-2012, Gilead saw strong wholesaler and sub-wholesaler purchases in anticipation of price increases effective January 1. Sales exceeded demand by approximately $130 - $150 million and may create inventory drawdowns during the first quarter of 2014.

Approximately 40% of product sales are international and are impacted by foreign exchange rates—something all global pharmaceuticals face. Foreign currency exchange, net of hedges, had a negative impact of $64.8 million on 2013

Product sales in Europe increased 6% in 2013 to $3.33 billion compared to $3.14 billion in 2012, driven by antivirals (what else?), specifically Eviplera, partially offset by decreases in the average net selling price.

The important Antiviral Products

Antiviral product sales increased by 15% in 2013 compared to 2012 and 2012 compared to 2011.

• Atripla sales increases were the result of an increase in the average net selling price. In 2012, it was sales volume growth and we can see the slowing in sales year-over-year –2013 +2% and 2012 +11%. I would always rather see growing demand as the vehicle behind growth rather than price increases. Atripla sales were 39%, 44% and 46% of total antiviral product sales for 2013, 2012 and 2011, respectively and the sooner Gilead spreads out its revenue among more drugs the better. The heavy reliance on Atripla and Truvada make them vulnerable to lost revenue if patent decisions go against them.

A generic version of Bristol-Myers Squibb Company's Sustiva (efavirenz), a component of Atripla, was made available in Canada and Europe in 2013 and will be made available in the United States in 2015. As a result, they expect increased competitive pricing pressure on our future Atripla sales and since price increases have been the key to continuing growth this is bad news.

•Decreases in Truvada sales were due to a decrease in volume, partially offset by an increase in selling price. In 2012, Truvada sales growth was volume growth in the United States. Truvada sales accounted for 34%, 39% and 41% of total antiviral product sales for 2013, 2012 and 2011, respectively. Future sales of Truvada could be impacted by patients switching to a different STR regimen. Again the sooner Gilead dilutes out the importance of Truvada, the better. It’s going and that’s good

• Increases in Complera/Eviplera sales were driven primarily by sales volume growth in Europe and the United States. Complera was approved in the US August 2011, and Eviplera was approved in the EU November 2011. During 2013, Complera became the number two most-prescribed regimen in treatment naïve HIV patients in the US and the number one most-prescribed regimen in treatment naïve HIV patients in Europe's Big 5 markets, the United Kingdom, France, Germany, Italy and Spain.

• Stribild increases in sales were volume growth in the US. Stribild was approved in the US in August 2012 and in Europe in May 2013. Stribild became the number one most-prescribed regimen in treatment naïve HIV patients in the United States.

• Sovaldi was just approved in December 2013 for HCV. Sovaldi sales totaled $139.4 million in 2013, with half related to initial inventory stocking by wholesalers and sub-wholesalers.

It was a great acquisition that made Sovaldi possible

Pharmasset

Gilead acquired Pharmasset in January 2012. Just one year later in December 2013, Sovaldi was on the market in the US and in January 2014. It was approved in the EU.

Pharmasset's primary focus was the development of oral therapeutics for the treatment of HCV infection and the lead compound was sofosbuvir

The price was $137 per share in cash through a tender offer and the aggregate cash payment to acquire all of the outstanding shares was $11.05 billion. The financing required issuance of $3.70 billion in senior unsecured notes issued in December 2011 and $2.15 billion in bank debt issued in January 2012. They ended 2012 with $7,054 million in long-term debt ($8,224 million total debt) up from $3,591 million total debt in 2011.

Considering what they got, the price seems fair. Pharmasset had three drugs in trials for HCV. It doesn’t appear that the other two are being worked on by Gilead. Pharmasset had no earnings and was burning cash. In that sense, Gilead overpaid but it looks like Sovaldi is going to payoff.
There was very little goodwill paid and most was intangible assets.


Recent acquisition
Gilead acquired YM Biosciences in February 2013 for $487.6. YM was a drug development company primarily focused on advancing momelotinib --- CYT387, an orally administered, once-daily candidate for hematologic cancers.

This acquisition fits with Gilead’s oncology pipeline, with idelalisib non-Hodgkins lymphoma and for chronic lymphocytic leukemia in Phase 3 and two compounds in Phase 2 studies.

CYT387 is an oral JAK 1/JAK 2 inhibitor for myelofibrosis, a proliferative blood disease that is similar to cancer. YM has reported positive results in Phase 1/2 clinical trials reducing anemia and the need for transfusions. It’s now in Phase 3 trials.

Debt

Gilead has paid down total debt to $6,636 at the end of 2013 mostly from convertibles expiring in August. Total debt/capital is 37% and the coverage ratio is 15X.

Debt is mostly senior unsecured notes and convertible senior notes The largest tranche of convertibles matures May 2016 and the interest rate at 1.625%. These are hedged and will help offset dilution.

The other large chunks are senior unsecured notes $1,248 million due 2021 at 4.4% interest and $998 million at 5.65% due 20141. There is a senior unsecured note maturing December 2014 for $749 million that I don’t anticipate will be a problem for Gilead. Otherwise much of the debt is several years from maturing and well staggered. Gilead, as with most major pharmas, generates enormous amount of cash flow from operations and debt should pose little risk.

Cash flow

Much of the cash raised from financing the past three years was debt to fund the Pharmasset acquisition

Cash provided by financing activities in 2012 was $563.3 million, driven primarily by net proceeds of $2.14 billion from the issuance of bank debt in conjunction with the Pharmasset acquisition, proceeds of $466.3 million from options and $213.9 million from proceeds received related to convertible note hedges.

The cash proceeds were partially offset by the $1.84 billion used to
repay debt financing during the year and $667.0 million used to
repurchase common stock under our stock repurchase programs.

Cash provided by financing activities in 2011 was $1.76 billion from selling $4.66 billion in senior unsecured notes --
$3.67 billion was raised in December 2011(Pharmasset acquisition.

Cash flow from operations is largely due to strong net income and low working capital consumption. Free cash flow is positive most years with 2012 an exception due to the Pharmasset acquisition.

 

Returns and future

With any acquisitions it’s always a good idea to look at the spread between ROIC and cost of capital.

The ROIC is dropping as acquisitions add assets and not much revenue.


The current cost of capital is 9.7% and in spite of declining ROIC, Gilead still creates value with a wide positive spread.

The rest of the story is less clear. As with any successful pharmaceutical company, competition and patents can change fortunes quickly. Patent expirations give us some warning since they are published. However, aggressive generic pharmas can alter scheduled expirations and the outcomes are never predictable until the rulings are final. At present Gilead has very few actual patent expirations facing its blockbuster, but Teva is trying to overturn a number of these far sooner than the 2021 dates.

Viread is gone in 2017. Truvada and Atripla will be contested in Canada in 2015. While Canadian sales lost would likely not crush Gilead’s revenue, it could set a nasty precedent for further challenges in bigger markets like the US. This is speculative but worth keeping in mind since Atripla and Truvada account for over $6 billion in revenue.

Offsetting these concerns is rapid uptake of Sovaldi and Stribild with the new hepatitis C medication combination of lepidasvir and sofosbuvir with ribavirin coming up for approval soon. This has the potential to be a multi-billion dollar drug, as does Sovaldi.

However, we always have to concern ourselves with competition and remember stories like Vertex and its lost Incivek sales. AbbVie has a powerful competitor looming large on the near horizon with Bristol Myers and Merck not far behind.

Gilead is a fortress of a company rolling in cash with little debt and a decent pipeline and high returns. There are very few biotechs that stack up to its numbers. Price is very much going to depend on patent dispute outcomes and pipeline success so in that way it’s like every other drug company big or small. It’s off the 52-week high at $72 down from $85. Might be worth an introductory small position. Valuation is nearly useless with uncertainties affecting growth in its near future. There is no dividend to backstop disappointing outcomes yet.

 

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