Gilead Sciences: Stock in Decline or Great Buying Opportunity?

After trading at $48 just three weeks ago on news of the Swine Flu pandemic , shares of Gilead Sciences (GILD) have embarked on a downward trend that now has the stock trading below forty three dollars, closing Thursday at $42.56.

Gilead Sciences is a pharmaceutical giant on the rise and any current drop in share price is unwarranted, in my opinion. The drop could be the result of an increase of shares sold short between March and April as shorts jumped on news that Gilead's experimental blood pressure drug, Darusentan, may have shown some safety concerns in a Phase III trial. Although it met both primary endpoints in the trial, there were five cardiovascular safety events that concerned investigators. The safety concerns may not amount to much after all because, according to reports, three of the five safety events were in relation to patients that had pre-existing heart conditions.

All being said, Gilead should bottom soon, if it hasn't already, before reversing course and ticking on the uptrend. There is too much potential growth opportunity in the company to justify a stock price drop below the forty dollar mark.

For starters, Gilead is sitting on billions in cash. This allows the company to build it's pipeline without looking for outside financing and also leaves the door open for purchases or mergers. In another scenario, the company could use some of that cash for a share buyback, which would increase the price of the stock.

Gilead also receives hefty royalties on sales of Tamiflu, among the most popular flu treatments in the world. Over the past couple of years, sales of Tamiflu have sharply declined as governments world wide had reached their stockpile goals, but with the swine flu still going strong, those governments will need to expend and then replenish their stockpiles. The reinvigorated Tamiflu purchases could lead to a nice payday for Gilead in their next quarterly report. Even with the US Center for Disease Control recently reporting that the Swine Flu virus is now resistant to Tamiflu, any increase in sales of the drug is a huge benefit to Gilead because royalty money is free money, meaning it costs the company nothing to maintain that revenue stream.

Gilead's earnings powerhouse, however, is it's pipeline of HIV drugs and associated treatments. HIV treatment remains Gilead's core business and it's leading drugs, Atripla and Truvada are two of the most popular drugs in the HIV market and supply Gilead with a steady, if not growing, revenue stream. The company is also developing a four-in-one HIV drug that is viewed as a potential blockbuster.

Looking to expand outside the boundaries of HIV treatment, Gilead also has a developing pipeline of drug candidates that treat hypertension, the flu and hepatitis. In fact, Gilead's already approved Ambrisentan has recently been proven effective in a Phase III trial in treating other pulmonary hypertension (PH) indications, opening the door for an increased, and expanding, revenue stream.

It may also be worth keeping an eye on two pending patent infringement lawsuits that Gilead has filed against Teva Pharmaceuticals (TEVA). Gilead alleges that Teva, while producing generic versions of Gilead's drugs, infringed upon various Gilead patents. If Gilead wins either case, or both, it is likely that the company will receive either a settlement payment, royalties on sales of Teva's drug or Teva may have to cease production. In each case, Gilead wins. If they lose, however, that could potentially hurt the bottom line.

GILD's recent decline in share price has created a great buying opportunity for those that were waiting to get in. Gilead is slowly setting the tone to become one of the world's leading pharmaceutical giants, and with all that cash on hand, a major acquisition, merger or pipeline purchase may not be too far off in the future.

As long as GILD is trading below $50, I'm buying.

Disclosure: VFC is long GILD.

Comments

[The Fox:]

A lot the catalysts you point to are one time events. Stockpiling Tamiflu will be a one quarter event, because as you noted, most countries were already stockpiled with the stuff. Swine flu was a media sensation, however, and large amounts of Tamiflu were not used. Investing in a company because it might win a patent dispute isn't a great idea either. Coin toss. Heads they win; tails they lose. I completely agree that it is a premiere company and that they are THE leading biotech. They aren't cheap on a valuation basis at 19x earnings (not overvalued either though).

The one thing you didn't discuss is the only thing that matters...politics. If Obama starts beating the "affordable drugs and healthcare" drum ALL these stocks are going lower. It is a certainty. I would agree that the stock looks compelling here, but you should do a better job of informing your readers about the downside risks. Cheerleading never helped anyone make money.

May 25 05:08 PM