Gilead Sciences (GILD) is the premier player in the global market for HIV treatments (about 80% of total sales). The company hopes that FDA approval of a new HIV product (the QUAD) will jump start its stock price, which has been flatlining since mid-2008.

The QUAD is a combination of four HIV medicines: Viread and Emtriva (a co-formulation known as Truvada), GS9350 (a boosting agent), and Elvitegravir ( a product that blocks integrase, an enzyme the AIDS virus uses to reproduce and infect cells). Gilead already markets Truvada, as well as Atripla (a co-formulation of Truvada and Bristol-Myers’ (BMY) Sustiva - another HIV drug).

The QUAD, a once-daily treatment, recently passed a small Phase II trial with flying colors. It met the statistical criteria of non-inferiority, compared to Gilead’s own Atripla. What this means is that the QUAD and Atripla were the same at reducing HIV levels in 71 patients after 24 weeks. This is significant because Gilead owns all four of the drugs in the QUAD. It doesn’t own Sustiva in the Atripla medication. And because it owns all four of the drugs, it will reap 100% of the profits from the QUAD should it become commercially successful.

The next step is the annual meeting of the Conference on Retroviruses and Opportunistic infections (CROI) on February 16th to the 19th, where the company will present detailed data regarding the safety of the QUAD combo.  After that, the product should proceed swiftly to Phase III trials later this year.  Should it prevail at that final hurdle, it could be marketed commercially as soon as 2011.

Our initial estimates suggest that the QUAD will generate more than double the revenues per patient than Truvada.  We calculate the QUAD can gross $2.7 billion by 2012-2014. And for every $100 million in QUAD sales, Gilead should earn $0.06 per share. One can, therefore, see that if all goes well, this drug could be a blockbuster for Gilead. There are, however, some potential snags.

The main competition will come from Isentress, marketed by Merck (MRK) a twice-daily pill in the same class as Elvitegravir. We think, though, that The QUAD should have a commercial advantage since it is a once-daily pill, and is expected to be more efficacious. Gilead’s boosting agent (GS9350) is also in head-to-head competition with Abbot Labs’ (ABT)  drug booster Norvir. Beneficial results emanating from the aforementioned Phase II trial for QUAD should aid GS9350 in the trial against Norvir. Other than Isentress, potential risks to QUAD’s success are safety issues, which will hopefully be put to rest at the CROI meeting. Efficacy is expected to be the same as other HIV treatments.

Gilead has a number of shared licensing agreements and joint ventures for HIV medicines with other major pharmaceutical companies, such as Johnson & Johnson (JNJ). These deals are beneficial in that they prevent the company from having to spend most of its operating cash flow on capital expenditures. It can, therefore, accumulate a safety net of cash, offering investors a somewhat smoother ride. In our opinion, Gilead leads the biotech area with a first-line of HIV treatments that work. It has generated a better-than-20% return on capital over the past 12 months, increased revenues by at least 20% a year over the last three years, and generated $100 million in cash from operations over the last 12 months.  Its fully-owned QUAD product, if approved by the FDA later this year, should enable Gilead to meet and beat that track record over the next five to 10 years.