Some companies are born out of necessity, or opportunity. See an underserved market, build a better mousetrap, etc. For Gilead Sciences (GILD) founder Michael Riordan, dengue fever was the mother of invention. Bitten by a mosquito and hospitalized for three weeks, nauseated, fatigued, and otherwise compromised, Riordan lamented the lack of drugs available for treating viruses such as that then inhabiting his bloodstream. So he decided to formulate one.

27 years later, Gilead is one of the quiet success stories of both medicine and Wall Street. The company now produces 16 drugs, which treat everything from cystic fibrosis (Cayston) to angina (Renexa.) Another couple of dozen treatments are on their way to market. The remainder of Gilead’s current roster combats pulmonary hypertension (Fiolan, Letairis), serious eye inflammations (Vistide, Macugen), fungal infections (AmBisone), and hepatitis B (Hepsera.) There’s also Lexiscan, a nuclear medicine treatment that opens blood vessels for examination. Gilead isn’t combating fibromyalgia and restless legs syndrome, but rather some of the most nefarious and insidious ailments around. (For related reading, see: What Are The Best Bets In Biotech?)

At The Forefront of Fighting HIV/AIDS

That leaves what are far and away Gilead’s two biggest moneymakers, HIV/AIDS drugs and flu treatments. The company produces no fewer than seven pharmaceuticals to fight HIV/AIDS, with prices ranging from $18 to $40 to $90 a pill. (There are multiple reasons why Gilead develops multiple HIV/AIDS drugs, contraindications being a major one.) When Michael Riordan was initially struck with a relatively tame viral infection, no one could predict that more impactful ones would become part of the landscape in the upcoming years. HIV/AIDS has since killed and rendered ill thousands of people, providing an opportunity for companies such as Gilead to capitalize upon. (If that sounds distasteful, consider the alternative – Gilead developing nothing.) (For related reading, see: Why There's Far More To Pfizer Than Viagra.)

Stacking The Deck

With the progress from drug development to public availability being famously sluggish in the United States, Riordan preemptively lured some of the most powerful people in Washington to serve as Gilead board members and executives. They include former cabinet secretaries Carla Hills, George Shultz and Donald Rumsfeld. For whatever reasons, Gilead drugs make it to market relatively quickly. Which dovetails with the story of what is perhaps Gilead’s most famous creation, Tamiflu. (For more, see: The Cost of Getting The Flu.)

In the mid-to-late 2000s, the fear of fatal contamination by “bird flu” swept much of the developed world. Even though bird flu cases were almost entirely restricted to rural parts of Southeast Asia, and numbered only in the dozens. Nevertheless, even with no reported cases in the United States, Tamiflu’s previous manufacturer sold tens of millions of doses to governments and non-governmental organizations. The United States Department of Health and Human Services authorized the purchase of $200 million worth of Tamiflu, in anticipation of an epidemic that still has yet to materialize. At the time, Gilead’s former chairman served as Secretary of Defense, sitting a chair or two away from the HHS Secretary.

Big R&D Spend

HIV/AIDS drugs are notoriously difficult to develop, and thus expensive. Which makes sense from an Economics 101 perspective too – create a product with enormous utility (saving the infected from what was formerly regarded as a death sentence), and a small but enthusiastic market (the vast majority of people don’t have HIV/AIDS), and said product won’t be cheap. (For related reading, see: Pharmaceutical Phenoms: America's Best-Selling Medicines.)

Gilead’s latest and potentially most profitable creation, Sovaldi, treats hepatitis C. Well, that’s an understatement. Sovaldi cures nine out of 10 patients, far more than any of the drug’s predecessors. Not only that, Sovaldi is a pill. (Previous hepatitis C treatments required the patient to administer a syringe.) Developing cirrhosis isn’t something you’d hope for, and Sovaldi provides a considerably more pleasant alternative. Even at $1,000 a pill.

That wasn’t a typo. And considering that a round of Sovaldi treatment consists of 84 pills, some insurance companies balk at covering it. Sovaldi’s sticker price might be shocking – as are those of other life-sustaining drugs – but you get what you pay for (freedom from future liver transplants). Still, lawmakers and bureaucrats in some current national governments, including that of the United States, decry Gilead for charging so much, even labeling its price “unsustainable.” The unintended consequences of this are clear. If Gilead anticipates that one day the price of Sovaldi will be set below the market clearing price by legislation (as has already happened in the United Kingdom, India and Egypt), the reasonable course of action is to charge as high a price as possible now. Furthermore, what distinguishes Sovaldi from other expensive drugs is that its customer base is relatively large. A dose of elaprase costs three times as much as a dose of Sovaldi, but the former treats a disease that an estimated 2,000 people worldwide suffer from. Tens of millions have hepatitis C. The result is that Sovaldi has generated $6 billion for Gilead so far, which represents what’s typically almost half a year’s revenue for the company. (For related reading, see: How Johnson & Johnson Became A Household Name.)

The Bottom Line

Many giant corporations’ contributions to society are tough to discern, or even justify. Some Wall Street titans offer financial liquidity, while there are others that offer rich tobacco satisfaction in smokable form. Fortunately, that still leaves plenty of room for a company whose objective, modus operandi, and mission are to save lives and ease discomfort around the world. (For more, see: Evaluating Pharmaceutical Companies.)

Related Articles
  1. Stock Analysis

    Healthcare M&A and Prescription Drug Prices

    Learn how mergers among health care insurance companies and drug companies could lead to increased premiums for consumers and lower drug costs.
  2. Investing Basics

    From Startup To Blue Chip: The Success Story Of Gilead Sciences Inc.

    Learn how Gilead Sciences went from a startup to one of the more successful pharmaceutical companies in the industry, and learn about its major drugs.
  3. Chart Advisor

    Gilead Sciences Inc

    For today's chart we've chosen to take a look at Gilead Sciences Inc. (Nasdaq:GILD) because it recently tested the strength of an influential level of resistance. As you can see from the chart ...
  4. Chart Advisor

    ChartAdvisor for October 9 2015

    Weekly technical summary of the major U.S. indexes.
  5. Investing

    Has Apple Finally Hit the Wall With the iPhone?

    We look at how the iPhone has sold over its brief existence and what that means for the future of the smartphone market.
  6. Stock Analysis

    How Yelp Adds Value to Local Businesses

    Understand how the Yelp platform operates and how it adds value to the business world. Learn about the top five ways Yelp helps small businesses.
  7. Stock Analysis

    Top 4 Companies Owned by Yahoo

    Understand Yahoo's acquisition strategies and how the company has been able to make so many acquisitions. Learn about the top companies owned by Yahoo.
  8. Stock Analysis

    YouTube Vs. Vimeo: Which One Should You Choose?

    Understand why online videos have become popular and how platforms are capitalizing on the trend. Learn about the differences between YouTube and Vimeo.
  9. Stock Analysis

    Markets Are Tanking: Time to Buy Like Buffett

    Learn about three value stocks Warren Buffett holds in his portfolio. See how Buffett uses market declines to find good deals on stocks.
  10. Stock Analysis

    Is BP's High-Yield Dividend Safe?

    Learn how receiving a greater than 7% yield from an oil major is a rare opportunity and one that comes with a fair share of potential dangers.
  1. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  2. Can mutual funds only hold stocks?

    There are some types of mutual funds, called stock funds or equity funds, which hold only stocks. However, there are a number ... Read Full Answer >>
  3. Does working capital include short-term debt?

    Short-term debt is considered part of a company's current liabilities and is included in the calculation of working capital. ... Read Full Answer >>
  4. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  5. How does the role of Medicare/Medicaid affect the drugs sector in the U.S.?

    Medicare and Medicaid have enormous influence on the pharmaceutical, or drugs, sector in the United States. For instance, ... Read Full Answer >>
  6. What factors make the drug sector good for value investing?

    The drugs sector is a good choice for value investing because it always has demand and a competitive moat. This simplifies ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!