Bull Case for Gilead Sciences, Inc. (GILD)


Since last October health stocks like Gilead Sciences, Inc. (NASDAQ:GILD) have undergone selling pressure, kicked off when Presidential Candidate Hillary Clinton tweeted on the pricing of the drugs. There was also a sense of feeling that health stocks were enjoying a premium, and that curbed the M&A activities. However, that seemed to have gone now as the price of the stock has come down 30.9% from the peak level and is trading just 4% above the 52-week low price. As a result, the stock has become cheaper, and possibly  attractive as far as valuation is concerned regarding price to earnings, price to cash flow, and even price to sales compared to the industry average. There might have been concerns about the competition in the hepatitis C market, but the company’s drug has established a clear superiority and continues to lead the way. Let’s look at the bull case for the shares of the company.

Leader In Hepatitis and HIV Market

Gilead Sciences, Inc. (NASDAQ:GILD)’s Hepatitis C product has enjoyed greater acceptance among the patients. The efficiency level of the drug is considered to be superior to the currently available products. It all took some planning to achieve specific goals. For instance, the company acquired Triangle Pharmaceuticals in 2003 a few months before the important approvals for the drugs meant for hepatitis B and HIV. The sustained planning has ultimately allowed the company to reach a strong position in the HCV and HIV market. As a result, the company is predicted to have a market share of 77% among the 750,000 patients in the America, who are taking the antiretroviral treatment for HIV.

In 2011, Gilead Sciences, Inc. (NASDAQ:GILD) made another acquisition of Pharmasset for $11 billion, and that gave the path to the currently available Hepatitis C drug, which is Sovaldi. The company came up with the new and improved version of it and it, named Harvoni. Their dominance in the market, as well as, in the total revenue could be seen from the 55% YOY growth achieved in the last year. Revenue from hepatitis accounted for close to 60% of its total revenue. There should not be any threat to its dominance from the likes of AbbVie Inc (NASDAQ:ABBV) or Merck & Co., Inc. (NYSE:MRK) mainly because of the efficacy level.

Underestimating Company’s Performance

There was a lot of attention paid to the $1,000-a-pill pricing by Gilead Sciences, Inc. (NASDAQ:GILD) for its Hepatitis C regimens. But the effectiveness of the drug was not given the same kind of attention since the drug could cure several patients within a few months. While saying this, it might give another issue, i.e. the company might lose its customers as they were rid of the ailment. The process might have already started if the Wall Street analysts’ predictions of the 10% drop in revenue of Harvoni and Sovaldi are to be believed. The company believes that the slowdown could be due to significantly lower veteran affairs sales projection as it depends on the government funding. However, the expansion of the market, i.e. beyond the Americas, and the growing ailment among the global population might provide some cushion.

However, an analyst from RBC Capital Markets Michael Yee seems to have different opinions. He believes that the combined revenue from Gilead Sciences, Inc. (NASDAQ:GILD)’s HIV, as well as, HCV would face 50% drop in the next five-year period. However, there appear to be some doubts since insurers are particular about who is getting covered for the Hepatitis C drugs that established pent-up demand. Moreover, the company’s earnings have consistently exceeded the Street projections by double-digit percentages in the last four quarters. That also suggested that analysts’ are not predicting their performance correctly and that their estimation seems to be underestimated one.

New HIV Medicine To Add Revenue

Gilead Sciences, Inc. (NASDAQ:GILD) has enough growth drivers to ensure that its revenue is growing and that there was no need to fear for loss of revenue. For instance, its Genoya is a new HIV medicine. However, that has enough potential to deliver revenue of $3 billion per annum before the end of the year 2020. Additionally, the company is also in the process of developing fresh treatments such as non-alcoholic steatohepatitis or NASH. That is a liver disease connected with obesity, which is a big issue globally. The strong product sales and additional revenue have the potential to pile up its free cash, which would be the most interesting aspect. Cumulatively, the company might be able to have $85 billion free cash by the end of this decade. That is a big amount and could be used for several possible things. The drug firm could use it to acquire fresh medicines or buy another company or repurchase its own shares significantly to boost its value.

Recently, Leerink’s analyst, Geoffrey Porges, altered its view on Gilead Sciences, Inc. (NASDAQ:GILD) outlook for its HIV drugs. Now, the analyst believes it has the potential to run through the end of its ten-year forecast period. His opinion was based on new TAF-based HIV combinations’ successful commercialization, as well as, the possible launch of a fresh blockbuster.

Valuation

Let’s also look at the valuation of the company’s shares. Currently, Gilead Sciences, Inc. (NASDAQ:GILD) has the price to earnings ratio of 7.8 times compared to S&P 500’s 18.1 times and its own five-year average of 21.0 times while the industry’s average is 76.2. Similarly, its price to cash flow was only 7.2 compared to the broader index’s 11.1 times and the industry average’s 13.8 times. Price to sales ratio was 4.2 times compared to its five-year average of 7.0 and the industry average’s 7.7 times. Therefore, it has the potential to reach the price target of $125 set by Leerink.

Conclusion

Gilead Sciences, Inc. (NASDAQ:GILD) shares surged 176% between 2013 and 2015. However, the stock shed nearly 16% in the current year itself. The significant drop from the yearly high price suggest that it has come to a position that the stock was oversold or the market reacted overtly. The valuation and growth in revenue also support the price to grow. Therefore, it could be the right time to buy the stock.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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