YOU WOULDN'T KNOW IT

by Wall Street's reaction on Wednesday, but

Gilead Sciences'

If the trend is any indication of what's to come for the Foster City, Calif., biotechnology company, Wednesday's sell-off could spell opportunity for investors.

Late Tuesday, Gilead posted third-quarter revenue of $493.5 million, up 51% from a year ago. The Thomson First Call consensus estimate called for revenues of $488 million, though a few analysts expected more. Their bullishness was driven largely by Truvada, a new combination AIDS therapy. Truvada sales accounted for $162.4 million, about a third of the total revenue for the quarter. Profits of $179.2 million, or 38 cents a share, were up 58.3% year-over-year and beat the First Call forecast by a penny.

Truvada, which combines Gilead's existing drugs Viread and Emtriva, has been steadily gaining market share since it was approved by the Food and Drug Administration in August 2004. From January to August of this year, there were roughly 3.7 million prescriptions for drugs in Truvada's class, known as HIV-reverse transcriptase inhibitors, according to IMS Health, a health-care information service. Truvada accounted for 327,000 of those prescriptions, or nearly 9%.

"Right now, Gilead's products are more or less the only growing products in this class of HIV drugs," says Jason Kantor, an analyst with RBC Capital Markets, a securities brokerage in New York. "Everyone else is losing share." (Kantor doesn't own shares of Gilead Sciences; RBC Capital Markets doesn't have an investment-banking relationship with the company.)

But there was some product cannibalization during the quarter. Because of the growing popularity of Truvada, sales of Gilead's other leading HIV drug, Viread, fell 2% to $189.4 million during the third quarter. Adam Cutler, an analyst with JMP Securities, an investment bank in San Francisco, says Wednesday's stock decline might be a reaction to this drop-off in Viread sales, which was steeper than some analysts expected. (Cutler doesn't own shares of Gilead Sciences; JMP Securities doesn't have an investment-banking relationship with the company.)

Of course, it's far better to keep market share in-house than to lose it to a rival. Truvada's major competition and the leading drug in its class is Combivir, another combination therapy, which is sold by GlaxoSmithKline. And analysts say Truvada can prevail.

"What is exciting about [Gilead] is that there is nothing standing in the way of its product line becoming the dominant product line in this class of HIV drugs," Kantor says.

Results of a study comparing the effectiveness of Combivir and Truvada in the same patients will be released in December at the Interscience Conference on Antimicrobial Agents and Chemotherapy in Washington, D.C. Kantor says preliminary data from the study favor Truvada. An abstract submitted to the conference suggests patients switching to Truvada had better outcomes because the drug is taken once a day, as opposed to Combivir's twice-daily regimen.

"In HIV, convenience translates into compliance," Kantor says, "and compliance translates into efficacy."

Sharon Seiler, an analyst with the New York-based investment bank Punk Ziegel & Co., says combination therapies like Truvada can be attractive to patients seeking to eliminate a co-payment. (Seiler doesn't own shares of Gilead Sciences; Punk Ziegel & Co. doesn't have an investment-banking relationship with the company.)

The other drug on long-term investors' radar is Tamiflu, an antiviral discovered by Gilead that has emerged as the weapon of choice in the battle against avian flu. In Gilead's third quarter, Tamiflu revenue jumped to $12.1 million from $1.7 million a year earlier. The dramatic increase was driven by nations stockpiling the drug in the event of a widespread outbreak of avian flu.

The problem for Gilead is that Swiss drug maker Roche Holdings holds the rights to Tamiflu under a 1996 development and commercialization agreement between the two companies. Roche is in charge of manufacturing and marketing the drug, and Gilead gets a roughly 10% royalty on all sales. Roche's production capabilities have come under fire, however, in the face of a potential global pandemic, and Gilead has brought the matter to binding arbitration, its right under the terms of their 1996 contract. If Roche can't speed up manufacturing to meet booming demand, then Gilead wants the rights to Tamiflu. The arbitration panel of three retired federal judges will have until March 2007 to decide.

"The arbitration with Roche, unlike baseball arbitration where arbiters must choose one company proposal or another, will allow for some arbiter discretion," David Molowa, an analyst with UBS, wrote in a report earlier this month. "This suggests to us that a compromise is the most likely resolution." The arbiters have up to 18 months to decide.

Roche has said it would attempt to meet demand by seeking out more production partners. On Tuesday, the company announced that it received Food and Drug Administration approval to build another manufacturing facility in the U.S.

In the worst-case scenario, the agreement between the two companies would remain unchanged, and Tamiflu would contribute about nine cents a share to Gilead's 2007 earnings, estimated at $2.09, according to Molowa. A best-case scenario outlined by Molowa has Gilead winning full rights to Tamiflu and partnering with another production facility that would meet high demand. In that case, Molowa projected Gilead's 2007 EPS would increase by about 32% to $2.76 a share. (Molowa doesn't own shares of Gilead Sciences; UBS doesn't have an investment-banking relationship with the company.)

Molowa's report didn't include estimates for sales of chicken soup.