Over the weekend, Barron's magazine picked Gilead Sciences (GILD) as one of its top 10 picks for 2015. The magazine argues the company's valuation is attractive, after the stock saw a sharp sell-off. I agree. I think Gilead will be able to keep its dominant position in the hepatitis C market, and the stock will move higher over the next year.
In the last two years, developments in the hepatitis C market have been breathtaking. Hepatitis C, a debilitating viral infection of the liver, which affects an estimated 3.2 million Americans, was essentially cured.
Because the medication is so effective, last year Gilead slapped a $1,000 per pill price tag on its drug Sovaldi. The entire course of treatment will end up costing approximately $84,000. Of course, that $84,000 treatment is just for patients in the United States. Other countries negotiate the price of their drugs. There are an estimated 150 million people that suffer with Hep C in the rest of the world.In Europe, the list price of Sovaldi is between $51,000 and $66,000.
Then, earlier this year, Gilead announced an even better version of Sovaldi called Harvoni and put an even higher price on the drug. The market for Hep C could grow to $12 billion, from virtually nothing two years ago.
Competitor AbbVie (ABBV) just announced it has received approval for its Hep C treatment called Viekira Pak. Some investors consider ABBV's medication inferior to Gilead's treatment. Most analysts consider the drug labels similar enough in terms of treatment duration to make it a wash.
Analysts have figured Gilead will probably end up with a 75% market share for hepatitis C and AbbVie will pick up the rest.
Last week, Express Scripts (ESRX) shocked investors by announcing it had partnered with AbbVie to exclusively sell its Viekira Pak as its recommended course of treatment to Express Script patients who have genotype 1 Hep C. Viekira requires four to six pills, with more than once-a-day dosing.
Investors assumed the exclusive deal means that Express Scripts will get a huge discount on the Viekira Pak. (I've seen estimates as high as 35% off list price.) AbbVie has also agreed not to charge twice as much for patients who need 24 weeks of treatment.
Despite fears over a price war, Gilead could report revenue of $27.6 billion, up 13%, mostly driven by sales of Sovaldi and Harvoni. Gilead also has a leading HIV drug franchise powered by Atripla, Truvada and Stribild.
Earnings are going to be driven by a sharp increase in gross margins. In 2013, the company reported a margin of 44.5%. Gilead should be able to report a gross margin of 66% in 2014 and 62% in 2015. With margins that high, earnings will go from $1.81 in fiscal 2013 to over $8 in 2014 and $9 in 2015.
Given the strong growth and the possibility of other promising drugs in the pipeline, I think the stock could get to $130 (or 14.5x $9 per share) over the next year.