Gilead Sciences, Inc. (GILD) stock is falling off a cliff Friday, plunging more than 5% on heavy volume.
I understand the negative sentiment: Merck (MRK) was just granted Food and Drug Administration approval Thursday afternoon for its hepatitis-C drug Zepatier, giving Gilead’s Harvoni another serious competitor.
That’s certainly not good news for GILD, which is now down 20% in the last year. After all, Harvoni brought in third-quarter revenue of $2.5 billion, accounting for a whopping 30% of all product revenues. AbbVie (ABBV), which also has an HCV drug on the market, is down some 3% Friday as well.
But after taking a certain amount of pain, you have to ask: How much is too much?
That’s precisely where we are with GILD stock.
GILD Stock Is Nearing a Bottom
Looking at the charts alone, there’s nothing that jumps out to declare that the GILD stock price will start falling anytime soon. In the mid- to low $80s, shares are trading well below their 50-day moving average ($99.49) and 200-day moving average ($106.36).
The only thing that brings any hint of hope is the relative strength index, which sits at 26.1. When the RSI, gets below 30, it’s taken as a sign that the stock is oversold. Over 70, and its overbought.
Gilead is in no danger of being overbought.
Click to Enlarge In fact, GILD stock is comically oversold, just as the RSI indicates. Sure, Merck’s Zepatier is priced at a 35% discount to Gilead’s Harvoni, but it’s not an apples-to-apples comparison.
For one, Zepatier has a narrower indication, meaning it is approved to treat a smaller, more specific patient population. Its label also requires that patients undergo liver testing before treatment, putting further restrictions on the size of the patient population.
Harvoni has no such restrictions.
Plus, we already know how Harvoni performs against competition: It has a dominant 93% market share in HCV, compared to just 7% for AbbVie. That’s not to mention the fact that the market already knew Merck’s Zepatier could get approved: Analysts expect GILD to report revenue about 2% lower in 2016 than in 2015, far less than the nearly 30% growth they expect in 2015.
In a brand new note, Citigroup says that while Harvoni pricing could take a hit, “Merck’s US label for their HCV agent is clearly inferior to incumbent competitors.”
Another Wall Street research firm, RBC, put out a note detailing seven reasons GILD stock is a screaming buy, even after Merck’s big approval. Some of the more compelling points:
“(1) Valuation is historical low 7-8x and below lows of 2008-09 when Street thought there’d be a generic HIV cliff.
(2) FCF yield on Gilead now at 10-12%+. Even if HCV revenues fell by 30%, FCF yield would still be 8% and PE still 10x and cheap to trough HCV levels.
(3) Gilead last reported $11B of their share buybacks remaining (largest in biotech) and we expect this to get more aggressive.”
Bottom line? Gilead’s RSI, criminally low valuation and massive share buyback plan, means GILD can only get so cheap. While it may take some intestinal fortitude, buying now doesn’t look like such a bad idea.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
