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Helen Han

GILD AT A GLANCE

P/E ► 17.5 AVG EV/EBITDA ► 13.1 AVG ROA ► 30.9% HIGH ROE ► 48.9% HIGH Debt to Equity ► 0.583 AVG Current Ratio ► 2.27 AVG Interest Coverage Ratio ► 58.4 HIGH

 

 

 

 

 

 

Gilead Sciences (NYSE: GILD) is a biopharmaceutical company that specializes in the development and commercialization of drugs for the treatment of HIV infection, hepatitis B infection (HBV), cystic fibrosis, fungal infections, and influenza A and B. The company currently markets a market-leading HIV drug portfolio as well as other drugs, which face strong competition from drug-makers such as GlaxoSmithKline (GSK), Novartis AG (NVS), Merck (MRK), Enzon Pharmaceuticals (ENZN), and Bristol-Myers Squibb Company (BMY).

Gilead's profitability can be potentially affected by various factors, including legislative and regulatory changes in federal and private insurance coverage of its drug products, competition from the development of generic drug substitutes, supply shortages of active ingredients in its drugs, the success of clinical trials of newly-developed drugs, and changes in FDA regulations.

Business Financials

As a biopharmaceutical company that focuses on the discovery, development, and commercialization of therapeutics for currently incurable diseases such as HIV infection, hepatitis B, and cystic fibrosis, Gilead has developed a strategy that relies on collaboration in the commercialization and research sectors as well as acquisitions of smaller companies with promising products.

Major Products

Gilead's product portfolio includes HIV therapeutic drugs that make up over half of its total sales revenue, as well as Tamiflu (antiviral treatment for resilient influenza), Hepsera (treatment of Hepatitis B), and AmBisome (treatment for invasive fungal infection). A sales breakdown for its main products is displayed below:

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Collaborative Strategy

• Commercial Collaboration Partnerships: As a significant part of Gilead's business strategy, the company has established numerous collaborations with other pharmaceutical institutions in the commercialization of some of its products. These include the partnership with Japan Tobacco to commercialize Gilead's HIV drug portfolio in Japan, the agreement with GlaxoSmithKline (GSK) to commercialize products internationally, as well as various commercialization agreements with Pfizer (PFE), Astella Inc., and OSI Pharmaceuticals, Inc. ^[3]

• Clinical Research Partnerships: Due to the nature of Gilead's products, Food and Drug Administration (FDA) licensing and approval is essential before these products can be sold legally in the United States (appropriate licensing procedures are also required for international sales). A large part of the approval process is the success of the product to pass clinical trials. To perform the research necessary for the clinical trials, Gilead has established partnerships with various institutions, including an international research collaboration with Japan Tobacco, an exclusive agreement with Achillion Pharmaceuticals (ACHN), Novartis AG (NVS), GlaxoSmithKline (GSK), and the University of Texas research system. ^[4]

• Manufacture Partnerships: All of Gilead's leading antiviral and therapeutic products are produced by third-party contract manufacturers. However, the recent acquisition of Raylo Chemicals, Inc., has enabled Gilead to expand its manufacturing capabilities to produce active ingredients in its drug products in order to improve existing manufacturing processes. ^[5]

Recent Acquisitions

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• Corus Pharma, Inc.: Corus specialized in the discovery of the drug aztreonam lysine for inhalation, which helps treat lung infections in patients with cystic fibrosis.

• Myogen, Inc.: Myogen's leading product, ambrisentan, is a candidate for the treatment of pulmonary arterial hypertension. This drug has been filed for New Drug Approval (NDA) with the FDA.

• Raylo Chemicals, Inc.: Raylo's focus in custom manufacturing of active pharmaceutical ingredients and advanced intermediates for the pharmaceutical industry has enabled Gilead to expand its manufacturing capabilities and improve current manufacturing processes. Specifically, this acquisition allows Gilead to use Raylo's developed facilities to manufacture active ingredients in their drug products.

Trends and Forces

• Reliance on Insurance Coverage Regulations: Legislative and regulatory changes to government drug reimbursement programs such as Medicare and Medicaid, as well as changes in insurance coverage by private insurance providers may affect the pricing of Gilead's drug products. Depending on what changes occur to these program coverages, Gilead may see a decline in revenues if physicians recommend different drug products due to reimbursement differences. Gilead expects that generic alternatives to Truvada will emerge into the market, which could affect the decision of insurance programs to discontinue or reduce reimbursement for Truvada use. This would cause a decrease in Gilead's sales revenue, as patients move away from Gilead products in favor of generic alternatives covered by insurance. ^[7]

• Increased Risk of Generic Drug Competition: A significant percentage of Gilead's sales come from only a few drugs, namely Truvada and Tamiflu. Currently, Truvada does not face significant competition due to lack of similarly effective HIV antiviral drugs, but as generic alternatives are produced, market share for Truvada may decrease, resulting in a considerable decline in sales revenue. ^[8]

• Reliance on Third-party Research Institutions: Due to Gilead's reliance on third-party contract research organizations to conduct clinical trials, they are unable to directly control the timing, expense and quality clinical trials. These factors may negatively impact Gilead's drug portfolio through prohibiting timely new drug development and increasing costs for the company. ^[9]

• Manufacturing Ability Restricted by Suppliers: To comply with FDA regulations, some of the ingredients used in making the drugs that Gilead commercializes are produced at only one facility. If delivery of materials from these facilities is delayed for any reason, this could affect the success and timeliness of clinical research trial results and product manufacture processes. ^[10]

• Changes in FDA Drug Approval Procedures: Gilead's products cannot enter the market until it has received new drug approval (or NDA) from the FDA. If changes are made to the NDA licensing procedure, this could result in a delay in the sales of new drugs developed by Gilead or the ability to sell existing drugs. As of the end of 2006, Gilead was developing a new line of drugs for the treatment of pulmonary hypertension as well as an inhaled treatment for cystic fibrosis. These drugs in development are mostly in Phase III of clinical trials. Depending on the success of the Phase III trials, the drugs can only enter market if they receive FDA approval. The new drugs are expected to become a large part of Gilead's drug portfolio and are essential for diversification of its products. ^[11]

• International Sales Affected by Exchange Rates : Gilead's drugs are marketed heavily in Europe and Asia, and international revenues make up more than half of the company's total revenues. Therefore, fluctuations in foreign currency exchange, trade regulations, and less adequate intellectual property rights protection mechanisms in foreign countries are all factors that could affect the company's overall profitability ^[12]

Competition and Market Share

Gilead's products mainly compete with other antiviral drugs commercialized by a number of other companies and institutions around the world. Due to the nature of the industry, Gilead's drugs compete with other available products in areas such as efficacy, safety, ease of use, doctor acceptance, price, and insurance coverage.

In the following chart, the sales revenue of the top three competitors of Gilead's products are compared. Although Gilead maintains its position as market leader for its HIV staple products in the global market, competition for Gilead's AmBisome is strong due to the variety of products on the market.

Footnotes

1. ↑ GILD 2006 SEC Filing 10-K, Item 7, Pg. 43, 47, 48
2. ↑ GILD 2006 SEC Filing 10-K, Item 7, Pg. 47
3. ↑ GILD 2006 SEC Filing 10-K, Item 1, Pg. 8
4. ↑ GILD 2006 SEC Filing 10-K, Item 1, Pg. 12
5. ↑ GILD 2006 SEC Filing 10-K, Item 1, Pg. 17
6. ↑ GILD 2006 SEC Filing 10-K, Item 1, Pg. 1
7. ↑ GILD SEC Filing 2006 10-K, Item 1a, Pg. 32
8. ↑ GILD SEC Filing 2006 10-K, Item 1a, Pg. 23
9. ↑ GILD SEC Filing 2006 10-K, Item 1a, Pg. 25
10. ↑ GILD SEC Filing 2006 10-K, Item 1a, Pg. 35
11. ↑ GILD SEC Filing 2006 10-K, Item 1a, Pg. 38
12. ↑ GILD SEC Filing 2006 10-K, Item 1a, Pg. 28
13. ↑ GSK Annual Report (SEC 20-F), Pg. 32
14. ↑ GSK Annual Report (SEC 20-F), Pg. 32
15. ↑ GSK Annual Report (SEC 20-F), Pg. 32
16. ↑ BMS Annual Report - Product Sales, http://investor.bms.com/phoenix.zhtml?c=106664&p=irol-financialinfolanding
17. ↑ GSK Annual Report (SEC 20-F), Pg. 32
18. ↑ Pfizer Annual Financial Report 2006, Pg. 16
19. ↑ Merck SEC 20-F Filing, Pg. 4
20. ↑ Enzon 10-K SEC Filing, Item 7, Pg. 44
21. ↑ Biota Annual Report, http://www.biota.com.au/uploaded/154/1021242_42bta-appendix4d-final-we.pdf