Gilead Sciences Stock: Still Cheap but Don’t Count On a Coronavirus Rally

It’s been a painful few years for Gilead Sciences (NASDAQ:GILD) stock owners. Since shares peaked at $120 back in 2015, they’ve dropped as much as 50%, woefully under-performing both the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) and the stock market as a whole.

Gilead Sciences Stock: Still Cheap but Don't Count On a Coronavirus Rally
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The company has suffered as sales of its class of blockbuster hepatitis C virus (HCV) drugs have slumped. It has tried to offset that with acquisitions and new drug launches from its R&D pipeline.

However, it hasn’t been enough. Profits have continued trending lower, and GILD stock has been in a protracted slump. However, Gilead is finally waking up, as shares have moved higher in recent weeks, even as the market has tanked. Here’s what you need to know about Gilead.

A Classic Value Trap In Recent Years

The reason Gilead has struggled is simple: The company’s HCV drugs cure patients, rather than treating them. This meant that the revenue boom of 2015 quickly turned to bust.

On the way down, Gilead was a classic value trap. For many quarters, it traded with a PE ratio in the 7-8x range, and folks kept buying more and more. Yet, the multiple stayed around there, even as the share price kept dropping. As the company cured more and more HCV patients, revenues continued to decline, and there weren’t enough new sales to offset the slump in their blockbuster class of drugs.

In 2017, the company’s revenues and profits finally started to bottom out, as did the share price, and I got involved with the stock around $70. That wasn’t a disaster — the share price ultimately didn’t fall that much lower. But it was still a value trap, even down more than 40% off the highs and buying at a high single-digit P/E ratio.

The stock has done a whole bunch of nothing for the past few years. Despite having massive cash flows from its HCV and HIV drug platforms, the company struggled to turn that cash into commercially successful new drugs.

Its questionable $12 billion acquisition of Kite Pharma added to the problems; Gilead took a large write-down on that asset earlier this year. Kite’s lead asset, Yescarta, was supposed to be a blockbuster drug. Instead it’s been an “okay” one whose growth has already pretty much stopped at levels far short of prior expectations. More recent acquisition activity has only added to shareholders’ doubts about Gilead’s management.

A Sleeping Giant Awakens

However, since mid February, Gilead stock has finally come to life. After spending an eternity trading around $65 per share, Gilead suddenly shot up north of $80 last week before sliding back in Monday’s market rout.

The company, as you’ve probably heard, has an antiviral drug candidate that has shown promising signs of efficacy against this strain of coronavirus. How does Gilead already have a drug in the works?

It’s important to remember that many of these potentially epidemic-causing viruses are extremely similar to each other on a genetic level; in fact coronaviruses have caused numerous epidemics throughout history, each of a slightly different strain. As such, Gilead and other companies have a history of testing drugs to fight this type of virus; Gilead’s coronavirus candidate was already being tested to fight the Ebola virus, for example.

Don’t Expect Windfall Profits

The problem is that this sort of drug is hardly going to make any money in the grand scheme of things. As the HCV drugs showed, curing a disease is far less profitable than treating a chronic condition. With HCV, at least, Gilead could charge a huge price for the drug; in this case, even assuming the coronavirus drug works, the amount of revenue they’ll earn from it would likely be modest. Price gouging during a public health emergency would not be a good public relations move after all. I’d argue that most of the rally in Gilead stock over the past week or two is pure froth.

In particular, I’d point to the end of February. One day, Gilead stock popped up to $78 on coronavirus news. The next day, as the virus lost steam, the stock traded down to as low as $67. With virus headlines picking up traction over the past week, the stock started trending up once again, topping $80. But those gains appear to be fizzling out again already.

The Case For Holding Gilead… Regardless

On the other hand, Gilead stock was arguably significantly undervalued prior to the virus outbreak. For example, Morningstar analyst Karen Andersen pegged fair value at $84 back in December when shares were trading around $65, and there was no coronavirus effect at all in that estimate.

That $84 estimate, however, cooked in a reasonable amount of ongoing growth from Yescarta, which other analysts peg as more of a bust. It also assumes some FDA approvals and more M&A success in the future. Still, if a reasonable estimate put fair value at $84 with no coronavirus impact whatsoever, it’s not hard to get to something like $90 as a price target given the improved sentiment now.

On a pure earnings basis, the stock is hardly expensive, even after its gains in recent weeks. It trades for just 11x forward earnings. Admittedly earnings aren’t going anywhere fast in the near-term, analysts’ consensus 2021 and 2022 estimates are pretty flat. Starting in 2023, however, analysts see significant growth kicking in as new drug launches outpace ongoing revenue declines from the HCV platform. Any growth on the current earnings base, plus the 3.4% dividend yield, makes for a decent investment.

GILD Stock Verdict

In recent years, I’ve lost some confidence in Gilead between watching the Kite deal turn into a bust and subsequent M&A deals equally failing to inspire. The company clearly remains a cash cow, but they’ve squandered some of their profits in recent years.

Frankly, I was tempted to sell Gilead stock into last week’s rally and take the gain. I don’t have great confidence in management to find another blockbuster drug at this point. Any resumed gains on corona virus would provide a decent exit point. On the other hand, the stock is still cheap. And Joe Biden likely securing the Democratic nomination is a huge boost for the healthcare industry compared to his rival.

Gilead’s management has more to do to prove that the company is no longer a value trap. Hopefully the company’s COVID-19 drug is effective, and takes out the virus while bringing shareholders a solid result.

In any case, the broader story hasn’t really changed that much; Gilead is undoubtedly cheap. That gives you safety in owning the stock. It may take awhile for shares to make it back to $100 and beyond, however.

Ian Bezek has written more than 1,000 articles for and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, Ian Bezek owned GILD stock.

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