The last few weeks — and the last few months for that matter — haven’t been easy for owners of Gilead Sciences, Inc. (GILD).
Already caught in the riptide of a biotech selloff put into motion in July of last year, a budding rebound from GILD stock was up-ended in late April following a quarterly report that indicated sales of its flagship hepatitis C drugs were falling.
Thanks to the 14% stumble since then, Gilead stock is now down 32% from its July peak around $122.
Perspective on GILD
The setback from one of the market’s most prolific biopharma stocks, however, has some bargain-hunters licking their chops. And rightfully so.
Just to stave off any confusion before it develops, Gilead Sciences isn’t the bulletproof name it was just a few years ago.
As is the case with any aging organization where billions of dollars are up for grabs, Gilead constantly deals with new competition, which imposes wear and tear on its portfolio. And, the development of new drugs is simply hard.
More recently, the biopharma industry has seen a regulatory headwind develop that takes dead aim at sky-high drug prices. This new sociopolitical movement puts Gilesd’s very expensive HCV treatments Harvoni and Sovaldi (which can cost nearly $100,000 for a full treatment regimen) in its sights … even more than the market did on its own.
Last quarter, sales of its hepatitis C drugs fell more than 5% on a year-over-year basis when they should have continued to grow. Cheaper alternatives took the bulk of that toll.
In the meantime, GILD shareholders have noticed a less-than-thrilling near-term pipeline, and a noteworthy lack of acquisitions — until recently anyway — that could refill said pipeline.
Point being, Gilead has challenges ahead of it.
After more than a 30% pullback in less than a year though, those problems and challenges are more than baked into the stock’s price. The risk-to-reward ratio Gilead stock presently offers is worth a shot.
Three Reasons to Own Gilead Stock
Gilead Sciences is a company with many moving parts in an industry that tends to be pushed and pulled by several ever-changing factors. For current and would-be investors though, three specific, long-term anchors are poised to become the foundation for a long-term recovery.
It has been a sore spot with investors for a while, but giving credit where it’s due, the company’s pipeline is fuller than the market seems to presume. It’s got about three dozen trials underway right now, seven of which are phase 3 trials, and three of which have already been submitted to the FDA for approval.
Either way, what it lacks in pipeline quantity, it offsets with quality. Simtuzumab, for nonalcoholic steatohepatitis (or NASH), is in a promising phase 2 trial, and Gilead is poised to become a pace-setter with relatively new tenofovir alafenamide (TAF) therapies as a treatment for HIV.
2. Future Acquisitions
Not that he didn’t do anything, but former Gilead CEO John Martin arguably didn’t do enough in the latter stages of his career as the company’s chief in the way of acquisitions. New CEO John Milligan is much more keen on the idea, saying earlier this month “It’s time for us to go out and do important deals … We need some other assets that can bolster our pipeline.”
There’s not a lot of ambiguity in that message.
3. It’s Still a Cash Cow
Gilead may be struggling to expand its HIV business, and its HCV franchises are already on the defensive though Harvoni and Sovaldi are both fairly young ventures.
None of that changes the fact, however, that Gilead is a cash-making machine and could do nothing but coast for a few more years and still drive an enviable profit (putting cash in the bank for a major deal down the road).
The specifics: Last year, Gilead turned a net profit of $18.1 billion, and drove free cash flow of $19.6 billion. Operating cash flow reached $20.33 billion.
Those numbers will likely shrink now that Harvoni and Sovaldi are facing headwinds … it just doesn’t matter. Even at half those levels, the $110 billion company is a bargain relative to its sustainable profitability.
Bottom Line for GILD Stock
Calling a spade a spade — the market simply priced in a worst-case scenario that just wasn’t plausible. From here, investors should start to recognize the value that was obscured by last year’s biotech meltdown.
It’s not too often you’ll see a biopharma of this caliber trading at a single-digit price-to-earnings ratio. GILD stock even has something for value-oriented income seekers: The present dividend yield is a decent 2.3%.
As of this writing, James Brumley intends to buy Gilead Sciences shares within the next 72 hours.