I last profiled "the new general" of biotechs,
(GILD), in early May after the company delivered an earnings
knockout punch to bears who thought a letter from a Congressman
lecturing about drug pricing would leave the stock's all-time high
near $85 untouched again for a while.
Well that 92% EPS beat was just followed up in Q2 with a 44% beat.
Gilead reported GAAP EPS that vaulted over 350% to $2.32 as revenue
leapt 136% to $6.53 billion. And sales of that key drug in
question, hepatitis C virus (HCV) treatment Sovaldi, hit $3.48
billion. Analysts expected only $1.61 on $5.86 billion total
How Did Gilead Become the New General?
In 2011 when GILD shares were only $20, the company bought
Pharmasset for $11 billion to acquire its HCV pipeline. At the time
it was considered a huge and risky bet for a company focused on HIV
and AIDS treatments.
But since the approval and launch of Sovaldi, the sales ramp has
been vertical for a disease affecting 3-4 million Americans and
over 150 million worldwide. Trailing 12-month revenues have moved
from $11.2 bln in Dec '13 to $17.44 bln at the end of the June
Here's what I wrote May...
The "Biotech Bubble-Burst" of 2014 will forever be remembered by
the sector's investors and traders for the pin that did the
pricking in late March: a letter from US Representative Henry
Waxman of California to Gilead Sciences about the pricing of their
hepatitis C drug Sovaldi.
The drug launched in December and was on its way to blockbuster
status -- generally regarded as at least $1 billion in annual sales
-- almost immediately. But at $84,000 for a 12-weak treatment
regime, it certainly raised some eyebrows.
"Our concern is that a treatment will not cure patients if they
cannot afford it," wrote Waxman along with other House Democrats
from the Energy and Commerce Committee.
The Real Cause & Effect Fallout
In the weeks following that letter, the Nasdaq Biotechnology Index,
best represented by its tracking ETF (IBB), fell nearly 20% and
completed a full 24% correction off its all-time high of $275 down
The undisputed leader of the pack, Gilead, fell 16% after the
letter and also corrected 24% in total off its all-time high near
$85 set in February.
But two realities became fairly obvious during that bio-wreck
1) The Biotech sub-sector was already frothy in Q1 and the Waxman
letter was only an additional, if not the final, straw
2) The chances of Congress impacting drug pricing, without insurer
support, is considered slim by most industry analysts
Why would healthcare insurers not jump at the chance to get
Congress to intervene in Gilead's pricing for Sovaldi?
Because the alternative for the cure that Sovaldi provides could be
much more expensive. Estimates for liver transplants run between
$400,000 and $500,000.
Another element here for insurers like Aetna (AET) and UnitedHealth
(UNH) is that while these blockbuster drugs for rare or
life-threatening disease get all the headlines about costs, the
industry has actually been saving more money with the steady
underlying growth of the generic drug business.
The Gilead Earnings Path
This is not to say that some day there won't be legislative action
to regulate drug pricing. This first shot across the bow gets a
conversation going that could be very productive and educational
for all sides.
Lawmakers need to understand the R&D dollars that a company and
its investors are willing to risk with experimental drugs. The
science alone is not their reward and if too many limits are placed
on potential profits, less R&D might ever be started.
So while that national conversation begins, let's look at the
earnings growth path of one of the strongest biotech franchises on
the planet. Below is the Zacks Price & Consensus chart for
Gilead, showing the strong ramp in estimates after the spectacular
Sovaldi sales numbers started pouring through in the past few
The details that you don't see in this chart are that EPS estimates
for this year have vaulted 21.4% from $5.98 to $7.26 in the past 60
days while 2015 projections have been raised 7% from $8.48 to
With such a big drug launch, analysts are still getting their
models tweaked to forecast full-year sales estimates which have
ranged from $5 billion to $11 billion. I bet those 2015 estimates
will keep going higher.
Clearly with Sovaldi bringing in sales of $5.8 billion in its first
two quarters on the market, the figures show the high acceptance
level among physicians and insurers for this life-saving treatment.
Why GILD is a Core Biopharma Holding
Sovaldi will be probably a cash cow for GILD for at least a couple
of years. Even if the company does $10 billion in sales annually
they are still only treating a small fraction of the market, with 3
to 4 million in the US afflicted with HCV and over 150 million
globally. This is a huge market which Gilead dominates.
Plus, GILD has a productive HIV/AIDS pipeline. And its blood cancer
drug, Idelalisib, could eventually compete with
(PCYC) Imbruvica in the treatment of chronic lymphocytic leukemia.
You can see the company's full drug pipeline on their website. But
suffice to say that when they beat the consensus top line number by
25% and 11% in the past two quarters, this is a biopharma
powerhouse with surprising cash-generating capabilities.
After the company's Q1 report, Deutsche Bank analysts raised their
price target on shares from $132 to $135. Hardly a real bump, but
it reaffirms their stance on the long-term growth they saw coming
I'm with them for the long-term on that call. At $93, the stock is
trading at only 10.25X next year's projected consensus EPS of
$9.07. But at a $143 billion market cap, it will take a while to
even get to $100. So that's why GILD is the perfect
"slow-and-steady" stock for biotech investors.
It's a core holding of many institutions and will only become more
so with these growth projections. In May when shares were trading
$78, I said "buying the stock in the $70s is probably a good place
to begin new positions. And don't miss those dips down into the
Now I would have to update that call and say "buy in the $80s and
don't miss those dips into the $70s."
To explore an up-and-coming biotech with a potential breakthrough
treatment for an even bigger liver disease affecting 350-400
million globally, hepatitis B virus (HBV), check out Zacks #2 Rank
(ARWR) who is due to release Phase 2 results of their key drug
ARC-520 this quarter.
ARWR shares have seen recent institutional buying by BlackRock and
Disclosure: I own ARWR shares for the Zacks FTM Portfolio.
Kevin Cook is a Senior Stock Strategist for Zacks.com where he runs
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
UNITEDHEALTH GP (UNH): Free Stock Analysis
PHARMACYCLICS (PCYC): Free Stock Analysis
GILEAD SCIENCES (GILD): Free Stock Analysis
ARROWHEAD RSRCH (ARWR): Get Free Report
AETNA INC-NEW (AET): Free Stock Analysis Report
To read this article on Zacks.com click here.