Seeking Alpha
Specializing in biotech stocks, Small Caps, managing optimized portfolios
Profile| Send Message|
( followers)

Summary

  • Gilead Sciences is the largest position in my portfolio, as it is the best large cap growth story in the market, in my opinion, right now.
  • Even though the company just crushed expectations on its last earnings report, investors are slow to realize its growth potential.
  • The stock is significantly undervalued compared to its big biotech brethren, as well as the overall market. Substantial upside lies ahead.

I want to talk today about Gilead Sciences (NASDAQ:GILD), a large cap biotech with a core HIV franchise, as well as a killer new drug (Sovaldi) to treat hepatitis C. On the recent dip in momentum stocks and sectors like biotech that initiated in early March; I doubled my stake in this fast-growing biotech juggernaut.

With those additional shares, Gilead Sciences is now the biggest position in my personal portfolio, with a cost basis now of around $70 a share. Why? Simply put, Gilead is the cheapest large cap growth story in the market right now, in my opinion. In addition to my equity position, I own long-dated bull call options with a strike price of $120 a share. If I am right and the stock doubles over the next two years, those call options will return some 1000%.

Even if the stock does not double in that time frame, I see considerable upside to this growth play over the next 12 to 18 months. The core driver will be the success of Sovaldi, which posted initial quarterly sales of $2.3B, which blew through even the most optimistic expectations. To put this in perspective, S&P started the year estimating Sovaldi would have $2.8B in sales... for all of 2014! Earnings per share during the quarter came in at $1.48 a share, almost 60 cents a share above the consensus.

Most analysts believe sales will drop off somewhat in the next quarter, simply because they believe some of the initial sales were "frontloaded" due to demand from serious hepatitis C-infected individuals - and their insurance plans - that were waiting for this drug to roll out.

Most estimates I have seen have Sovaldi putting up $5B to $9B in annual sales for 2014, which would make it the biggest new drug launch in history. There does seems to be more concern than is prudent around the high price tag ($84,000 for 12 weeks of treatment), which has drawn the ire of some in Congress and has kept sales expectations on the conservative side.

These worries are overblown for two reasons, in my opinion. First, Sovaldi is almost entirely effective in eradicating hepatitis C, and only needs to be taken via one pill a day. Possible competing treatments are unlikely to be as effective against hep C, and are likely to have to be taken several times a day.

Second, because Sovaldi is so effective against disease, it takes the possibility of a liver transplant off the table. These procedures run from $500K to $1mm per surgery, so Sovaldi's price hardly seems excessive, putting it in that light.

Currently, Sovaldi is usually given in conjunction with Olysio, a compound from Johnson & Johnson (NYSE:JNJ). This combination can bump the price tag to ~$150,000 for a course of treatment. Gilead has also developed ledipasvir, which inhibits the activity of a protein needed for viral replication.

Gilead has filed an NDA with the FDA for a sofosbuvir-ledipasvir combination, which will also be dosed as one pill, once a day. Obviously once, and if, this combination is approved, Gilead will have a new and powerful income stream, as it should be able to eliminate the need for Olysio and keep 100% of treatment cost for itself. Both of the above two points were articulated in very solid recent article right here on Seeking Alpha.

Gilead will also continue to develop new compounds within its market-leading HIV franchise. Investors have been slow to catch up with Gilead's growth story, even as it recently blew through quarterly expectations in its last earnings report.

Analysts have taken notice, though. The consensus earnings estimate has gone from ~$4 a share for FY2014 to over $6 a share since earnings were reported. The consensus for FY2015 is just under $8 a share, moving from under $6 a share prior to quarterly earnings.

This means an investor can pick up a large cap growth stock that is predicted to more than triple its earnings this fiscal year over 2013's levels for 13x forward earnings.

This is not only substantially under valuations of other large cap biotech brethren like Biogen Idec (NASDAQ:BIIB) and Celgene (NASDAQ:CELG), but also at a discount to the overall market multiple (~16x forward earnings). Way, way too cheap given Gilead's much superior growth prospects. The company seems to agree, as it recently added $5B to its stock buyback authorization. STRONG BUY.

Disclosure: I am long GILD. 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.