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EU Approval of Blockbuster Drug Could Mean Big Returns From This Pharma Giant

If you think pharmaceutical companies have a license to print money, think again.

Of say 5,000 compounds that could possibly treat a disease, only about 250 (or 5%) will have sufficient potential to be tested on mice or other animals. Of these 250, 10 will then be tested on humans in Phase 1 trials. Of these 10, roughly two will eventually be approved for marketing. Even then, the chances of producing a blockbuster drug with more than $1 billion in annual sales are slim.

Gilead Sciences (NASDAQ: GILD) is a biotech play with the potential to generate a blockbuster -- one with potential sales of $20 billion. The drug is called sofosbuvir, and it is an oral treatment for the hepatitis C virus (HCV).

Gilead specializes in treatments for HIV and hepatitis C. Already, the company is one of the world's largest providers of HIV treatments. And it could soon become an even bigger force. On May 28, the biotech firm announced the European Commission granted approval for Stribild, its HIV treatment tablet.

Stribild received U.S. approval in August 2012. It's also been approved in Canada, Australia, South Korea, Japan and Turkey. However, EU approval could substantially boost Gilead's drug sales -- and profits.

But, what really holds promise for Gilead -- and its shareholders -- is its potential treatment for HCV.

According to the World Health Organization (WHO), 203.2 million people across the globe, or 3% of the world's population, suffer from HCV.

In Europe, where according to WHO, about 4 million to 5 million Europeans carry HCV, the percentage is even higher.

Last month, the European Medicines Agency (EMA) authorized the marketing of sofosbuvir across all 27 European Union countries. Sofosbuvir could become available in the EU as early as 2014.

Gilead is also seeking approval for sofosbuvir in the U.S. About 3.2 million Americans have HCV, according to the Centers for Disease Control and Prevention.

Approval of sofosbuvir would be a huge boon for Gilead. Currently, the worldwide market for HCV drugs is about $5 billion. But analysts predict a successful HCV pill could increase this number four-fold, to $20 billion.

Based on Gilead's potential to produce a blockbuster, shareholders are driving up the stock price.

On May 22, the stock touched an all-time high at $58.06.

Since then, shares have lost 9%. However, the technicals remain extremely bullish, and the pullback appears to be presenting traders with a profitable entry point.

Rising from a November 2011 low near $17, shares have formed a major uptrend, increasing more than 200%, to date.

In early 2013, the stock surpassed resistance near $38.50, which had capped the stock for several months during the fall of 2012. Since breaking this resistance, an accelerated uptrend line has formed. The stock tested that trendline on June 3.

With little historical resistance in sight, the stock could soar. The 24 analysts following the company project an average price target of about $65, with the most optimistic estimate at $88.

At current levels, the median target of $65 represents 23% potential returns.

The strong technical outlook is supported by solid fundamentals.

For the upcoming second quarter, scheduled to be reported in late July, analysts anticipate increased drug sales could push revenue 10% to $2.65 billion from $2.41 billion in the comparable year-earlier period.

For the full 2013 year, analysts expect European approval of the company's HCV and HIV drugs could cause revenue to increase 9.4% to $10.61 billion compared to $9.7 billion last year.

The earnings outlook is also optimistic. In the second quarter, analysts expect earnings will stay about flat, falling a penny to $0.49 per share as opposed to $0.50 per share in the year-earlier quarter.

However, for the full 2013 year, analysts anticipate increased drug sales will cause earnings to increase about 1% to $1.97 per share from $1.95 per share last year. With pending EU approval of sofosbuvir, the 2014 outlook is even more positive with estimates for earnings of $2.90, a nearly 50% increase.

Risks to consider: Final European approval for the company's HCV drug is still in the works. If approval is not granted, the stock could fall. As with many biotech plays, the trade contains an element of risk, but also presents the potential for great returns.

Recommended Trade Setup:

-- Buy GILD at the market price
-- Set stop-loss at $45.89, below a shelf of support formed in March
-- Set initial price target at $64.99 for a potential 23% gain by late 2013