The US biotechnology industry, which is a speculative growth market, is going up as investors are becoming optimistic about its growth and investing big sums into companies. According to the Financial Times, investors have poured some $725 million into the floatation of 10 biotech companies. Even though out of these companies only one has come through with a drug, investors are still ready to take the potential risk. The reason for this is that an investment in the right company which is expected to come up with a breakthrough in biopharmaceuticals would provide more returns than many other stocks.
Investor confidence shown by the large sums being invested into biotechnology is because of current developments in the market, according to which the biotechnology companies are outperforming the major market indices. Since the beginning of FY13, the Nasdaq biotechnology Index has gone up by 32% (click to enlarge).
Source: Yahoo Finance
And the preference for these stocks is so high that it is easier than ever to bring a biotechnology company to market.
The graph above shows some of the major players in the US biotechnology market and their performance against the Nasdaq Biotechnology Index. Apart from the Nova Nordisk A/S ADR (NYSE:NVO), which has seen a dip below the index since April FY13, the rest of the companies are performing fairly well. Out of this lot, Gilead Sciences Inc. (NASDAQ:GILD) has performed at an excellent rate and has gone up by 120% since July 2012.
GILD Business Analysis
Gilead Sciences Inc. is a biopharmaceutical firm which specializes in the discovery and development of drugs for highly infectious diseases. It is a research-based company and one of its main focuses right now is on HIV. GILD initially started as a biotech startup, but has now turned into a fully-fledged biopharmaceutical company which produces and commercializes its drugs on the global market.
Trends in Biotechnology Industry Stocks
Being a stock of a highly speculative nature, GILD's performance cannot be evaluated with the basic techniques of financial analysis. Being a biotechnology company, it is a risky investment, which is why its performance will be evaluated on the basis of its growth and the events which result in risk subtraction. These events include the number of patents acquired by the company, the number of products in the pipeline and FDA approvals, and breakthroughs by the company in launching new drugs. In these aspects GILD is at the top of the market. It has all the key HIV patents right now, which will begin to expire in 2018. To mitigate this risk, Gilead is working on several other regimens which would help in the extension of its HIV-based profitability in the future. Currently GILD has four different pipeline products in phase III testing which are based on the concept of a single fixed-dose regimen for HIV patients. In 2012 GILD achieved a number of breakthroughs when the FDA approved its third single-tablet regimen, Stribild®, along with Truvada® for pre-exposure prophylaxis (PrEP). Apart from the developments in the field of HIV treatment, GILD is also working on other focus areas such as liver, cardiovascular and respiratory diseases, and has a number of FDA-approved drugs listed in its product portfolio. Furthermore, to increase its accessibility in the global market, GILD is working on a growth strategy by collaborating with a total of 70 different drug manufacturers to ensure its reach into other continents
Gild Revenue and Competitive Analysis
Source: Company Financials
The increase in the number of products being offered by the company and the number of consumers that it caters to has boosted the revenues of the company to a large extent. This has helped the company to compete in the market with a stronger stance and gain the confidence of investors.
The table above shows that GILD is highly undervalued on the basis of price to earnings compared to the industry, and so are its competitors. This proves the point of all those investors who think that the biotech industry has huge potential for growth. On the basis of price to book and price to sales, GILD is mildly overvalued.
GILD is currently making headlines for its latest achievements in introducing several fixed-dose tablet regimens for HIV patients. A number of its drugs have gotten approval from the FDA and EU Marketing. The number of pipeline products and patents in the focus area of HIV would ensure the company's long-term profitability. Though the whole biotech industry is performing extremely well and growth is expected of all the major market players, still on the basis of the newly achieved patents, pipeline products and expected breakthroughs, GILD is one of the most attractive investments in the industry. Therefore, I would suggest a strong buy stance for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.