Great News For Gilead Sciences And HCV Patients

On the fast track

On May 21 the European Medicines Agency [EMA] delivered some very positive news for Gilead Sciences Inc. (GILD) and its oral hepatitis C drug sofosbuvir. The EMA will provide an accelerated review of Gilead's Marketing Authorization Application [MAA] the once-daily oral nucleotide analogue inhibitor for the treatment of chronic hepatitis C virus [HCV] infection.

Gilead's MAA submitted to the EMA on April 17, 2013 includes Phase 3 study data that supports the use of sofosbuvir to treat seven of the 11 major HCV genotypes. For patients with type 2 and 3 HCV infections, the data submitted supports the use of sofosbuvir along with ribavirin, another orally delivered drug. Data submitted also supports treatment of treatment naive HCV genotype 1, 4, 5, and 6 patients for use of sofosbuvir in combination with ribavirin and pegylated interferon injections.

According to the WHO, approximately 3% of the world's seven billion people have HCV, with four to five million in the EU alone. Since sofosbuvir is considered a new medicine of major public health interest, it is being fast tracked through the EU's regulatory hurdles. According to Gilead's release, if approved by the EMA's Committee for Medicinal Products for Human Use, the drug could be available in all 27 member states of the EU in the first half of 2014

Sofosbuvir not included in recent FDA 483 letter

Gilead submitted a New Drug Application [NDA] with the same Phase 3 trial data to the FDA in April 2013. The FDA has since issued a Form 483 letter questioning the company's test procedures, stability testing and laboratory controls regarding several drugs under review. During the Q1 2013 earnings call Gilead's Executive Vice President, Research and Development and Chief Scientific Officer, Norbert Bischofberger, said the "483 observations are specifically related to Elvitegravir, Cobi and Stribild, Complera, Atripla, and Truvada," with no mention of sofosbuvir.

Turning Japanese

Recently,! Gilead CFO, Robin L. Washington, mentioned the company is in discussions with the Japanese regulatory agency. Gilead is establishing a "direct presence" in Japan, and plans to start a Phase 3 study of sofosbuvir in genotype 2 HCV infected patients there.

Superiority in the laboratory and medicine cabinet

Assuming the Phase 3 data is acceptable to regulatory agencies, Sofosbuvir has several advantages over existing antiviral HCV treatments that should make it wildly profitable for the company, and its investors.

Sofosbuvir directly suppresses viral replication, ribavirin and pegylated interferon do not.Sofosbuvir's Phase 3 data shows it more effective -- depending on HCV genotype -- with less adverse effects than pegylated interferon.Among patients for whom pegylated interferon is not an option due to adverse reactions or lack of response, treatments with sofosbuvir in conjunction with ribavirin were highly effective -- also depending on HCV genotype.Also, sofosbuvir is an oral pill taken once daily.

Who's laughing now?

Last year, Gilead endured its fair share of criticism when it acquired Pharmasset -- the previous owner of sofosbuvir -- for $11.2 billion. According to FactSet Research Systems, (FDS) annual sales of sofosbuvir could reach $6.42 billion by 2017, easily making it the company's biggest seller.

Putting a price on sofosbuvir and Gilead

If you assume that Gilead's single pill HIV patent cliff strategy works, and then simply add the $6.42 billion analyst estimate of sofosbuvir sales to Gilead's current TTM revenues of $9.95 billion, you arrive at a total revenue of $16.37 billion in 2017.

Over the past five years Gilead has maintained a quarterly profit margin between 20-40%. If you apply a 30% profit margin to the total revenue figure of $16.37 billion mentioned above, you arrive at a net income figure of $4.91 billion.

The average number of outstanding shares recorded in Q1 2013 was 760 million. Assuming Gilead doesn't dilute or repurchase shar! es, you a! rrive at earnings of $6.46 per share. At Gilead's recent price of about $55, that's a PE multiple of about 8.51 times 2017 earnings.

If you apply a reasonable PE multiple of 20 to the projected earnings figure of $6.46 above, that's a share price of $170.23. That would be a total increase of 209.5% in five years, or a compound annual growth rate of 25.4%.

Excuse me while I place an order

Of course, the simple valuation above makes a slew of lofty assumptions, including quick regulatory approvals. The important takeaway is that Gilead sciences may not be as overvalued as it seems. If sofosbuvir really is the blockbuster that it seems, the company's recent PE of 28 isn't so high after all.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GILD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)