(GILD) Gilead Sciences Analyst Maintains Neutral on Shares

We have maintained a Neutral rating on Gilead Sciences, Inc. (GILD) following appraisal of fourth quarter and full year 2011 results.

Gilead’s adjusted earnings per share of 92 cents (including stock option expense) for the fourth quarter of 2011 missed the Zacks Consensus Estimate by 8 cents, as higher revenues were offset by increased research and development (R&D) expenses. However, earnings were 2 cents above the year-earlier figure of 90 cents. Fourth quarter revenues were up 10% from the prior-year quarter to $2.2 billion, spurred by higher product sales. Total revenue also edged past the Zacks Consensus Estimate of $2.19 billion.

Other than the fourth quarter miss, 2011 was an eventful year for Gilead on all fronts, namely commercial, regulatory and financial.

Gilead’s strategy of creating fixed-dose combinations of existing HIV/AIDS drugs has been a resounding success. Gilead’s most popular HIV combination medicines, Truvada and Atripla, have allowed the company to maintain robust growth in HIV product sales. While Truvada is a combination of Gilead’s Viread and Emtriva, Atripla is a combination of Truvada and Bristol Myers Squibb’s (BMY) Sustiva.

Gilead’s newest combination HIV drug Complera/Eviplera is the second single tablet regimen (STR) introduced by Gilead, the first being Atripla. In the second half of 2012, Gilead is expected to launch another important treatment option for HIV patients. The US Food and Drug Administration (FDA) is expected to decide on the fate of Gilead’s most anticipated HIV pipeline candidate, the Quad pill. Quad is a combination of Gilead pipeline candidates – elvitegravir and cobicistat – along with Truvada. The FDA will give its decision regarding approvability of Quad on August 27, 2012 (target date). We believe the positive outcome of phase III studies (Study 102 and 103) will lead to approval of Quad.

On approval, Quad has the potential to reach blockbuster status and become a market leading HIV medicine. We believe Complera/Eviplera together with the pipeline candidate Quad pill, on approval, will further strengthen Gilead’s HIV franchise. Other drugs in development for HIV include elvitegravir and cobicistat which have also shown positive data. Gilead hopes to file the new drug application (NDA) for both elvitegravir and stand alone cobicistat in the second quarter of 2012.

Further, Gilead is hoping to build one of the largest hepatitis C virus (HCV) pipeline. This is aided by the company’s January acquisition of Pharmasset, a maker of HCV drugs. The acquisition has added GS-7977 to Gilead’s pipeline which is being studied in various phase II/III trials for all types of HCV patients. Gilead hopes to get GS-7977 approved in combination with ribavirin in the first half of 2014. Gilead believes GS-7977 has the potential to be combined with Gilead’s internal HCV pipeline candidates resulting in multiple oral regimens aimed to spare the use of the current standard-of-care pegylated interferon associated with some serious side effects. We believe that the successful development of the HCV pipeline will help diversify Gilead’s revenues from 2014 and beyond and eventually ease the impact of the patent cliff looming in 2017-2021.

Other pipeline candidates like GS 6624, being studied for idiopathic pulmonary fibrosis (IPF), pancreatic and colon cancer, myelofibrosis and liver fibrosis, and GS 1101 being studied as a single agent in refractory indolent non-Hodgkin’s lymphoma (NHL) and in combination with rituximab in chronic lymphocytic leukemia (CLL) also hold promise.

However, we are concerned about patent challenges against the company’s key HIV drugs. Most of Gilead’s important products are facing patent challenges from companies seeking to launch generic versions of those drugs. We therefore prefer to remain on the sidelines.

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