Buy Gilead (GILD) for Deep-Rooted Growth in 2016

While Gilead Sciences (GILD) saw a few moments of greatness last year, by and large, it was just a mediocre year for the stock.

Buy Gilead (GILD) for Deep-Rooted Growth in 2016GILD stock is now right back where it was trading in August of 2014 and is testing the limit of investors’ patience. It begs the question — will Gilead snap out of this funk in 2016?

Only time will answer the question for sure, but between huge sales growth of its hepatitis C portfolio (in addition to its perennially fruitful HIV/AIDS portfolio), the recent weakness in GILD stock may well be a buying opportunity.

FDA Rolls out the Red Carpet

It can’t be denied that hepatitis C treatments Sovaldi and Harvoni are (a) selling very well and (b) curing hepatitis C about as well as anyone could hope.

But the biotech industry isn’t without harsh criticism. Namely, the pricing of drugs have drawn the ire of Presidential hopeful Hillary Clinton who brought mainstream attention to the ridiculously high cost of some specialty drugs.

At $1,125 per pill, a typical 12-week regimen of Harvoni costs a total of $94,500. Sovaldi is slightly more affordable; a full treatment plan only costs $84,000, or $900 per pill … if you’re in India.

Those are staggering numbers for “just” a pill, but sticker shock hasn’t gotten in the way of sales. During the third quarter of 2015, the company drove $1.47 billion worth of sales of Sovaldi and $3.33 billion worth of Harvoni revenue.

And sales of Harvoni are, realistically speaking, likely about to get even better.

It’s not a guarantee, but Monday evening Gilead Sciences told investors the FDA had given priority review status to a combination of the drugs Sovaldi and Velpatasvir as a therapy for hepatitis C. A priority review simply means the FDA wishes to accelerate any approval decision because that particular drug “would [present] significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions when compared to standard applications.”

The Sovaldi/velpatasvir combination has also been granted the designation of breakthrough therapy, as it will “treat a serious condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on a clinically significant endpoint(s).”

That’s saying something. Sovaldi already demonstrated tremendous efficacy. Gilead just made it even better. Reading between the lines, costs aside, the FDA wants to approve this improved treatment.


Two realities shine through for current and would-be owners of GILD stock who can look beyond the debate over the high costs of the two drugs, both of which have clearly won the favor of the FDA as well as of the healthcare marketplace. The first of those realities is, the product is selling phenomenally well despite the price tag. The other is, Gilead Sciences is still much more than just a hepatitis C play.

During the third quarter alone, Gilead generated $8.3 billion worth of revenue, $3.5 billion of which was not driven by sales of hepatitis C drugs.

It’s not been easy on the HIV/AIDS front of late, mind you. GlaxoSmithKline (GSK) is the number-two player in the market, behind Gilead, and it’s catching up in terms of market share.

The recently announced decision from Glaxo to acquire the HIV portfolio Bristol-Myers Squibb (BMY) developed speaks volumes about how serious GlaxoSmithKline is getting about the HIV/AIDS market. All the same, Gilead not only has a decent (albeit small and simple) HIV/AIDS pipeline, it’s wading deeper into oncology and cardiovascular waters than most investors realize.

As for its newest bread-and-butter business — hepatitis C treatment Sovaldi and Harvoni — as well as the two therapies they have been selling, the company has only penetrated a tiny portion of that market. To date, 600,000 patients have used one of the two treatments, but the total hepatitis C market consists of 185 million people.

Yes, Gilead Sciences will likely need to be more competitive in terms of pricing to better penetrate all of that market, but there’s room to do so and still turn a profit. In fact, some sort of price-break has almost certainly been given to CVS (CVS), for example, in exchange for near-exclusivity of its hepatitis C drugs. Similar deals have been struck with other sellers too. Gilead can afford to offer such price breaks simply because the pills don’t cost anywhere near $1000 to make.

Bottom Line for GILD

Last year was a tough one for the stock (even if it wasn’t an especially tough one for the company’s top and bottom line) mostly because the market wasn’t sure of Sovaldi’s and Harvoni’s longevity at sky-high prices.

Now, though, the supply and demand dynamic has been found, and while few payers/patients are paying full price for the drugs, they are paying an impressive price for the drugs. If a firm, five-figure price wasn’t going to hold up, it would have broken down by now.

That’s not to say the price of either drug won’t fall further in 2016 and beyond. It likely will. But what Gilead gives up on a per-pill basis it’s apt to offset on a volume basis. It simply spent 2015 testing the pricing waters, not wanting to make a concession it didn’t have to.

More important, with the dust settling and the value of Harvoni and Sovaldi being clarified at the same time Gilead Sciences continues the development of a surprisingly deep and wide pipeline, the single-digit trailing and projected price-earnings ratios GILD is sporting translate into a buying opportunity most of the market is ignoring.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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