Gilead Sciences: A Biotech No More

Gilead (GILD) just reported a blockbuster quarter.

I owned Gilead shares for couple of years, sold in 2008. I had an impressive gain (about 80% in couple years). My reasons for selling are outlined here.

Gilead is on the conversion path. It was a biotech company. Now it's becoming a plain drug company. Sure, it has a great HIV franchise, and a bunch of unique drugs. But we know from Jim Cramer's book "Real Money: Sane Investment in an Insane World" that biotech companies are valued based on their pipeline. At the time I decided to sell, the company had pipeline information on its web site. It was there, although it wasn't impressive at all. Now this information is gone. All you see are currently available drugs.

That's not good. Looks like the current management has decided to cut research expenses and live from the current stock. This changes investment conditions completely. Gilead currently trades at P/E 22, which is low value for a biotech company. But it's way too high for a drug company. For comparison, Pfizer (PFE) trades at P/E under 11. In other words, as a drug company, Gilead is double overpriced. Of course, Gilead is a better company than Pfizer, it has longer patent protected terms for cash cow drugs, its HIV franchise is peerless, so it probably can command higher P/E. But 22 feels too high, and the company doesn't pay a dividend.

I still don't see a reason to buy GILD. I can change my mind if the company declares a dividend or if the stock pulls back significantly.

Full disclosure: At the time of publication author did not have any positions in GILD or PFE. Positions can change at any time.

Comments

[Alex Filonov:]

Editors, please fix a misprint in the last line of the fourth paragraph.

Apr 23 11:10 AM

[Dan Jacome:]

I guess you could say a stock is "double overpriced" if its PE is 2x that of a peer (b/c investors willing to pay twice as much for $1 in earnings than it would for another company), but you really need to consider more the earnings growth behind the companies (tied to PEG ratios), the longevity of that earnings, the risk of those earnings, etc. A P/E multiple is more than some arbitrary marker - and there is much more to consider than what you have stated. That said, nice trade with the GILD and I liked the article.

Definitely will be interesting to see if they continue on their own or "tap out" and fold into a larger pharmaceutical com trying to fill the holes in its top line...

Apr 24 08:42 AM

[User 401605:]

uh?

www.gilead.com/pipeline

that's aztreonam lysine already filed, 4 drugs in Phase III, 8 drugs in Phase II, and 4 drugs in Phase I. a few of those are secondary indications for already approved drugs, but that's still a solid unique pipeline.

Apr 24 02:57 PM

[bassmaster17:]

GILD is a quality company, but don't buy it if this swine flu is your motivation. Such buyers are doing so based on emotions. I did that during the bird flu media buzz and sold it regrettably when it went down. There are many strains of flu that never get press, but every two or so years the media finds one to cover and cause the public to panic...next we'll get shark attacks.

Apr 27 08:47 AM