Back in 2015, Hillary Clinton sent out a tweet promising to tackle price gouging, and that about marked the end of a secular bull market for biotech stocks. The iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB), which had rallied from $65 in 2009 to nearly $400 in 2015, started to tumble, and many biotechs followed including Gilead Sciences, Inc. (NASDAQ:GILD).
Bad news rushed in from all angles. Clinton’s tweet was prompted by a New York Times piece which uncovered that Martin Shkreli and company had hiked the price of a drug from $13.50 to $750. Then there was the demise of Valeant Pharmaceuticals Intl Inc (NYSE:VRX), followed by an EpiPen scandal at Mylan N.V. (NASDAQ:MYL).
While GILD stock also fell, the reasons were largely unrelated to the scandals which plagued its peers. The company’s big Hepatitis C Virus (HCV) drug worked really well. Cure rates are up so much that the HCV market is now in a secular decline. Expectations are for the HCV market to compress roughly 2% per year over the next decade.
Gilead’s operations are likewise getting sliced. Revenues are in free fall and expected to continue to compress over the next several years. Same thing with earnings.
So GILD stock slid from about $120 in July 2015 to $65 in June 2017.
But fortune has started to change for GILD stock. It’s up nearly 20% over the past three months. I think this rally is legitimate and that GILD stock could be gearing up to retest its 2015 highs.
Why Now Is a Good Time to Buy GILD
Gilead just spent $12 billion acquiring Kite Pharma Inc (NASDAQ:KITE). The acquisition does two big things: 1) it critically diversifies GILD’s business away from the eroding HCV market, and 2) it plunges GILD into the exciting new market of using cell therapy to treat cancer.
The acquisition won’t lend itself to any immediate benefits. Gilead management doesn’t expect the deal to be accretive to earnings until year four. But the benefits this acquisition could yield are quite huge.
Consider that Kite Pharma’s lead drug candidate is axi-cell. Early trial runs of the drug have been super successful, as response rates have soared far higher than peer numbers. FDA approval is expected later this year, while European approval is expected in 2018.
Insiders say that axi-cell will fetch an asking price of $300,000 per year and that the annual sales volume of the drug could be up to $2 billion.
GILD’s revenues are expected to be around $26 billion this year. A $2-billion boost would be a nice way to get things back on track.
But who’s to say this will all work out as planned? Well, this isn’t Gilead’s first rodeo with turning a big acquisition into a major revenue stream.
The company did the same thing back in 2011 when it acquired Pharmasset, Inc. (NASDAQ:VRUS) to get into the HCV game. At the time, the deal was labeled as risky and experimental considering Pharmasset had no significant marketed products. But GILD saw the potential in the HCV market and seized the opportunity.
It looks like the same thing is happening here in the CAR-T market with the Kite Pharma acquisition. Consequently, now looks like a good time to load up on GILD stock while the stock is still cheap with major growth catalysts on the horizon.
Bottom Line on GILD Stock
GILD stock is dirt cheap at 11 times next year’s consensus earnings estimate. Granted, earnings are falling, but the Kite Pharma acquisition coupled with what looks to be operational consolidation in the HCV market implies that next year’s earnings estimate of $7.40 per share may be near a bottom.
If that is true, then this stock should easily fetch a 15-times multiple on that $7.40 estimate. That would imply a price target of about $110, right near 2015 highs.
I think that is where GILD stock is headed next.
As of this writing, Luke Lango was long GILD.
