Gilead (GILD) - Great Q4 Earning report is a Preview of Things to Come in 2007

Gilead (GILD) is a large biotech company with a portfolio of marketed products that include royalties from the blockbuster Tamiflu for treatment and prevention of influenza, as well as HIV drugs that are combination pills which makes them more attractive to patients because of easier dosing regimens.

Earlier this year, Gilead reported 4th quarter 2006 financial results that were quite impressive. Here are some highlights:

- Q4 and FY2006 sales of $900 million and $3 Billion respectively ($437 million from royalties from sales of Tamiflu).

-Q4 and FY2006 earnings per share of $0.78 and $2.52 ( both beating consensus estimates partly due to a lowered tax rate).


- Atripla and Truvada (both HIV treatments) showed no signs of canibalization which should continue in 07.

- In 2007, Gilead is planning to launch products acquired through purchase of Corus and Myogen in 2006. In addition to revenue growth, expansion into other therapeutic areas (respiratory/pulmonary) will diversify Gilead's portfolio, strengthening the company against competition in infectious disease areas.

As of 2/10/2007, GILD stock is trading at $71.16 or 25X this year's earnings of $2.9/share and 20X next year's estimated earnings of $3.6/share. This gives Gilead a PEG of around 1 and puts it in a fair valuation category. If the company delivers as expected, I believe the fair value of GILD shares towards the end of 2007 should be around $80 (25X 3.6 and a subjective discount factor).

There are however some risks to consider. Gilead recently terminated a HepC product that was in Phase II clinical trials, hurting the value of it's pipleline. Also, the success of Gilead in new therapeutic areas is uncertain.

As far as Biotech stocks, GILD is a relateively safe play specially in case a bear market breaks out. The company is expected to generates $1 billion in cash flows in 2007 and given it's strong growth potential, it should have a floor of $60 even in worst market conditions. Given recent bad news about HepC trials, I would wait and buy this stock below $70.

JMHO.