The Next Blue Chip Stocks: Gilead Sciences

Great blue chip stocks aren’t made overnight and they’re rarely content playing second fiddle in their market. Instead, they’re established leaders that dominate their competition.

By that definition, finding the next blue chip stock isn’t easy. Few companies successfully displace and disrupt markets enough to capture the lion’s share of their industry. Sure, they may dent existing players, but dominate? Hardly. But that doesn’t mean its impossible. For example, Gilead Sciences (ETR:GIS) is arguably among a select few companies that may be ready for blue chip status. Here’s why.

Overshadowing competitors

While Gilead’s latest foray into hepatitis C has captured most of the media attention this year, it’s Gilead’s HIV drug franchise that makes the company blue-chip worthy.

That’s because while hepatitis C treatment is moving fast and market share leadership has been fleeting, Gilead has commanded the market for HIV therapies for years.

The company won FDA approval for its first HIV therapy Vistide, a treatment for cytomegalovirus retinitis in patients with AIDS, in 1996. Gilead followed Vistide up with AmBisome in 2000 and Viread in 2001 and Gilead hasn’t looked back since, rolling out an impressive series of highly successful HIV mono-therapies, including Emtriva and Truvada.

But Gilead’s pole position in HIV treatment doesn’t simply come from a successful research and development program, it also stems from Gilead’s ability to combine its own HIV treatments with other HIV drugs like those made by Bristol-Myers Squibb. Those combination therapies reduce the number of pills HIV patients need to take (improving patient adherence rates), boosts script volume, and extends patent protection on some of Gilead’s best sellers.

Source: Express Scripts

For example, Atripla unites Bristol-Myers’ Sustiva and Gilead’s Emtriva and Viread. It was Gilead’s first combination drug and despite being on the market for eight years, Atripla sales still total in the billions of dollars annually, making it the top selling HIV therapy in the United States.

More recently, Gilead has launched two other important combination drugs: Complera, which won FDA approval in 2011, and Stribild, which won FDA approval in 2012. Complera and Stribild’s current sales pace suggests that Gilead may end up with five different billion dollar blockbuster HIV drugs this year.

Source: Author’s calculations

That’s an impressive accomplishment, but more impressive may be that sales momentum isn’t slowing. Last year, Gilead notched more than $9 billion in sales for its various HIV therapies and this year sales of those drugs total $4.7 billion through June, up nearly 10% from 2013.

Thanks to earlier detection and longer living patients, use of these drugs is growing, not shrinking. According to the CDC, 2.5 million new cases of HIV are diagnosed every year, more than 34 million people are living with HIV globally, and the average lifespan following HIV diagnosis has more than doubled since 1996.

Gilead breaks into new markets

Gilead’s HIV therapies have given it flexibility to invest in a slate of promising new drugs, but none is likely to match the success of the company’s hepatitis C drug program. In its first six months on the market, Sovaldi has displaced existing treatments to become the most prescribed hepatitis C drug in the U.S., with more than $5 billion in year-to-date sales.

Although Sovaldi will soon face a slate of promising competitors, including drugs made by AbbVie and Bristol-Myers, a second generation drug combining Sovaldi with another new Gilead drug, ledipasvir, is right around the corner.

If all goes Gilead’s way, the FDA will approve that new drug in October. If so, a cure rate in the high 90% range and the ability to completely eliminate pesky, side-affect laden interferon and ribavirin from treatment guidelines should mean that Gilead continues to control the hepatitis C market next year, too.

Undeniably, Sovalid and Sovaldi/ledipasvir will have a big impact on Gilead’s top and bottom line, but Gilead isn’t relying solely on hepatitis C to diversify itself away from HIV. It also won approval for its first cancer drug this past summer when Zydelig got the FDA nod for use in patients with relapsed chronic lymphocytic leukemia, follicular lymphoma, and small lymphocytic lymphoma in July. While those aren’t big indications, Zydelig still marks an important foray into another important market.

And another thing

Gilead is going to be flush with cash over the next couple years and investors are right to wonder how it will be spent. The company is sitting on over $9.5 billion in cash and equivalents coming out of the second quarter, up from $2.6 billion at the end of 2013, and although Gilead is likely to see a slowing of short term demand for Sovaldi ahead of the Sovaldi/ledipasvir launch, the company’s cash stockpile should continue growing, putting investors in an enviable position.

Some of that cash will be used for buybacks. The company repurchased 15 million shares in the second quarter alone and approved a $5 billion buyback that will come into play once the existing repurchase authorization is depleted. Outside of buybacks, there’s also the possibility for targeted acquisitions or perhaps a special dividend, too. Regardless, Gilead’s fist-in-class product line, substantial cash hoard, and solid pipeline makes it the envy of many blue chip peers.