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Gilead Reports Second Quarter in the Black

The biotech is on a roll, but its valuation is getting a little pricey.

Updated from Oct. 31

There's nothing scary about the surging sales and profits in

Gilead Sciences'

(GILD) - Get Gilead Sciences, Inc. Report

third quarter, but the biotech firm's valuation has some investors spooked.

The Foster City, Calif.-based company reported its second consecutive profitable quarter, with third-quarter net income of $20.8 million, or 10 cents per share, including a one-time, non-operating charge of 8 cents per share. This compares with a net loss of $25.2 million, or 13 cents per share in the year-ago quarter.

Excluding the charge, Gilead earned 18 cents per share in the quarter, topping the consensus Wall Street estimates by 10 cents, according to Thomson Financial/First Call.

Total revenue in the quarter rose 163% to $134 million, including net product sales of $120.2 million, up 169% from the third quarter of last year.

Gilead Sciences has steered clear of the multiple mishaps and pratfalls of the rest of the biotech sector this year, while two drug approvals and strong sales growth have catapulted the company into the ranks of profitable biotech firms. Add that all up and you have a recipe that stock investors can love. Gilead shares are up more than 5% this year, closing Thursday at $34.59 -- a nifty performance, given that the Amex Biotechnology Index is down 40%.

But as will happen, Gilead's valuation has already factored in the expected sales growth from its newest drugs, the anti-HIV treatment Viread and Hepsera for hepatitis B. And with an experimental drug pipeline that's pretty bare, Gilead is priced for perfection, according to some biotech observers.

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The stock trades at 61 times 2003 earnings estimates, a premium to the profitable biotech group. Gilead is just breaking into the black, so that can skew price-to-earnings markers, but the company, with a $6.8 billion market value, is also trading at 11 times 2003 sales. Again, this is higher than its biotech peer group.

Earlier this month, UBS Warburg biotech analyst Andrew Gitkin initiated coverage on Gilead with a hold rating, calling Gilead a "great company," but one that appears to be fairly valued. His firm doesn't do banking for Gilead.

One fund manager summed up his trading strategy on Gilead quite neatly. "A really good company, lousy stock, and one that I short every time it gets above $35."

A countervailing argument comes from Banc of America Securities' Mike King, who also initiated coverage on Gilead recently, but with a buy rating and a 12-month price target of $40. King's position is that Viread and Hepsera stand a good chance of exceeding sales growth expectations, and given the dearth of good growth stories in biotech these days, the company deserves to trade a premium. King's firm doesn't do banking for Gilead.

Checking back on the third-quarter results, Viread sales totaled $68.9 million, a 54% rise from second-quarter sales and comfortably above Wall Street estimates. (Viread hit the U.S. market last October and was introduced into some new European countries during the quarter.)

Sales of Ambisome, an anti-fungal drug, rose 18% to $48.6 million in the quarter. A new antifungal, Vfend, from


(PFE) - Get Pfizer Inc. Report

is expected to pinch Ambisome's sales growth going forward.

Gilead's newest drug, Hepsera for hepatitis B, was granted U.S. approval on Sept. 20. Sales, if any, for the quarter, were not broken out in the company's release.