Positive Drug Results Boost Gilead

Long-time readers of Investor Uprising know that we have been fans of Gilead Sciences Inc. (Nasdaq: GILD), a large-cap biotechnology stock in our IU25 Index. This morning, shares are exploding 14% higher, up $6.88 to $53.49, on news of good clinical results for its experimental hepatitis C drug.

If you want to get technical, Gilead announced "sustained virologic response data for 12-Week regimen of GS-7977 plus pegylated interferon and ribavirin in genotype 1 hepatitis C patients." Translation: Gilead's drug combination appears to be making hepatitis C patients better in clinical trials, with an 88% response rate in a group of patients.

The study was released along with the results of some other drugs by the European Association for the Study of the Liver.

Why is this big news? Hepatitis C has been a particularly difficult disease to treat, and it is widespread. It can turn into a lifelong illness that destroys the liver. It is estimated that as many as 170 million people have hepatitis C infections worldwide, which would make it a major drug market if an effective treatment were discovered.

Research estimates have put the hepatitis C market as large as $15 billion.

Golden Results for Gilead

Gilead jumped up 14% this morning on positive drug results.

Gilead isn't the only company working on hepatitis C. In fact, other companies did well in this study. But because it is an attractive drug market there is a bit of an "arms race" to work on treatments. Bristol-Myers Squibb (NYSE: BMY) earlier this year bought hepatitis C developer Inhibitex for $2.5 billion. Gilead acquired Pharmasset, which makes the nucleotides included in this study. Bristol's Inhibitex is taking a similar nucleotide approach.

In fact, Bristol announced positive results in its own phase-two study of its drug, daclatasvir, in combination with Gilead's GS-7977, and that had even better results, with a response rate of 100% in one group of patients. Bristol shares were trading up $0.72, or 2% on the news to $34.28.

This is also another data point confirming the widespread trend identified last year in Investor Uprising's Guide to Biotech Investing: Biotech companies are outpacing big pharma in R&D and drug discovery, making them attractive acquisition candidates.

Gilead was originally included in our IU25 Index in April 2011, because of its excellent operating history and the fact that its valuation held up favorably, compared to other large drug and biotech companies.

Though Gilead is not as cheap as it was when we selected it -- last year it traded as low as $34 -- it still has an attractive valuation, which, clearly, investors are bidding up in light of the hepatitis C news. The company has a forward price/earnings ratio of 12 and a price/book ratio of 5. What has always been attractive is its outstanding profitability: Gilead has an operating margin of 45% and a 12-month return on equity (ROE) of 43%.

Analyst profit estimates for the stock have been remaining steady at about $3.84 per share for the current year. With a P/E multiple of 15, that would price the stock at about $57.

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