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The Bull Case for Gilead Amidst Recent Hep C Sales Cliff Worries

Gilead Sciences' (GILD - Get Report) hepatitis C pill Sovaldi remains on pace to shatter all records for the most successful drug launch in history, but the company's stock price is falling, down 10% since February 25. Gilead is up just 4% year to date.

What is going on with Gilead?

Investors are looking past the rocketing Sovaldi prescriptions this year and are more concerned with what happens four or five years from now when the pool of hepatitis C patients is expected to essentially run dry.

Here are some numbers for perspective, provided by the always-helpful Mark Schoenebaum, biotech and pharma analyst at ISI Group. Investors surveyed by Schoenebaum forecast 2014 Sovaldi sales of $6.5 billion. But when asked to predict Gilead's total hepatitis C sales in 2019, the same investors come back with $4.9 billion.

In other words, investors believe Gilead's jaw-dropping revenue boost from hepatitis C will be short lived. There's a hepatitis C "cliff" ahead and Gilead is going to fall right off it.

This is the same argument investors used to pummel Gliead years back, before the $11 billion acquisition of Pharmasset and the drug that would become Sovaldi. If you weren't around at that time, investors fretted over the expiration of key HIV drug patents which would put a big crimp in Gilead's dominant HIV drug business -- and the company's ability to grow earnings. These concerns died down post the Pharmasset acquisition when attention shifted to hepatitis C, but they've returned. 

But here's a key difference, according to one bullish Gilead investor who spoke with me today: By his calculations, Gilead could have almost $40 billion in cash by the end of 2017. And more importantly, they will be able to borrow against all that cash, which means Gilead will have a mountain of money with which to do deals. 

Gilead has transformed itself twice already with incredible success. The first was the acquisition of Triangle Pharmaceuticals in 2002, which turned the company into an HIV powerhouse. The second deal, obviously, was the Pharmasset purchase. 

This investor believes Gilead is not just sitting still, waiting to fall off the hepatitis C revenue cliff. He believes Gilead will look completely different by 2016 or 2017. Gilead is already moving strongly into oncology. It won't be the only changes made to the company in the next few years. 

Assuming Gilead doesn't have a transformational plan in the works is "the mistake investors made with HIV and it's the same mistake they're making with hepatitis C," this investor said.


Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.


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