- Gilead Sciences is succeeding beyond the wildest dreams of its bulls as of only eight months ago.
- Its forward P/E is low relative to the market, thus incorporating caution about the sustainability of profits from its hepatitis C franchise.
- Yet the shorts have established a significant and growing position in the shares.
- I take that fact to be yet another attractive feature of GILD shares, especially in view of the latest newsflow on Gilead.
Background: Randy Newman may have been thinking about short sellers in his song Short People:
Short people got no reason
Short people got no reason
Short people got no reason
They got little hands
They walk around
Tellin' great big lies..
They got grubby little fingers
And dirty little minds
They're gonna get you every time
Well, I don't want no short people
Don't want no short people
Don't want no short people
I'm a charitable sort, and wish no ill to the shorts as individuals, and certainly accuse no one of lying - but I just wonder why they like Gilead Sciences (NASDAQ:GILD) so much. Aren't there actual dodgy, dubious and unprofitable public companies with stock they might want to expose as grievously overpriced?
Why are they bothering shorting the shares of one of the great corporations of our time?
This article updates why I think they are barking up the wrong tree in shorting this powerhouse.
With Gilead actively buying back stock, which has been rising for months, a bit of a slow, steady short squeeze just might be underway.
Introduction: Gilead is on a roll driven by fundamentals. It does not have a bubble-type chart or a bubble-type story. The chart, shown below, is one of a successful company picking up speed due to the most successful pharmaceutical product introduction in the history of the known universe. Note the acceleration above an already-rapid long-term uptrend. I respect this acceleration. If you don't want to buy into it, that's fine. Enron was a good short; so was MCI. These were liquid shares of companies that lived on the edge/ the dark side from an accounting standpoint. But shorting in force a financially-strong company that has been blowing earnings estimates away? Some things are just a mystery. Whatever the reason, the NASDAQ data show that shorting has increased lately in GILD even as the company has been increasing its share buyback. Note that GILD had the practice, before acquiring Pharmasset for sofosbuvir (Sovaldi's active ingredient), of shrinking shares outstanding. So this management does not just sterilize options grants, it rewards non-selling shareholders by using cash to make them proportionately larger holders of the remaining shares. That's classic shareholder-friendly activity by the board.
Here is the public NASDAQ data on GILD shorts:
Settlement Date Short Interest Avg Daily Share Volume Days To Cover 7/31/2014 98,473,543 14,643,274 6.724831 7/15/2014 95,485,621 11,356,669 8.407890 6/30/2014 93,715,153 9,625,018 9.736621 6/13/2014 92,230,036 10,372,330 8.891930 5/30/2014 94,135,575 10,329,624 9.113166 5/15/2014 98,243,605 12,602,148 7.795783
The shorts were cowed a little bit for a while in May and June, but came right back. Here is the chart they are fighting:
Splits: Feb 22, 2001 [2:1], Mar 8, 2002 [2:1], Sep 7, 2004 [2:1], Jun 25, 2007 [2:1], Jan 28, 2013 [2:1]
I've been looking at charts since 1979. Between Value Line and the Internet, I've looked at hundreds of thousands of charts since then.
My view is that GILD has a chart you either want to be long of (as Dennis Gartman might phrase it), or you want to stand aside and get out the popcorn. When the fundamentals of a corporation - sales and EPS - are both strong and accelerating, and the forward P/E is below that of the average stock, and there is acceleration on this sort of chart that uses a log scale for the y-axis, my investing and trading sense coincide and lead me to believe in this case: Go with the flow. Don't fight the tape. If you're long, stay long and strong. Or, go longer.
Especially if the news gets better and better as the stock moves on up. Which is what's been happening.
(Of course, there are no guarantees.)
Gilead - operational update: Britain's health-cost regulator is now positive on Sovaldi treatment at a rate of about $700 per tablet, saying in part:
"Many people with the disease either don't complete the full course, or are reluctant to seek treatment in the first place," Carole Longson, director of the NICE Centre for Health Technology Evaluation, said in the statement. Sovaldi "could potentially encourage more people to seek treatment."
Whether Gilead will be selling direct to the government or whether a distributor will be taking a cut of this amount is not known to me. In the U.S., the publicized retail price of about $1000 per pill is not the price that Gilead receives, as Gilead sells to a middleman.
Britain is not a hotbed of hepatitis C cases, but it's a populous country. The positive decision out of NICE is helpful and a bit of a surprise, given some previous negative statements on Sovaldi from it. Sovaldi is a great drug product, a true advance in therapeutics, and not enough media attention has been given to that fact.
(What's amazing is the CEO's comment a couple of months ago that Gilead had internal debate about whether to perform an additional arm of a clinical trial in order for Sovaldi to be filed separately, ahead of the combo with ledipasvir. Their correct decision is a sign of top-flight management.)
Also helpful is Gilead's very recent win in arbitration of Roche's complaint that it had patent rights to sofosbuvir/Sovaldi. Gilead filed the following on Aug. 14 with the SEC:
In March 2013, Roche initiated an arbitration against us and Pharmasset, predecessor to Gilead Pharmasset LLC, regarding a 2004 collaboration agreement between Roche and Pharmasset. In the arbitration demand, Roche asserted that it had an exclusive license to sofosbuvir pursuant to the collaboration agreement because sofosbuvir, a prodrug of a uridine monophosphate analog, is allegedly a prodrug of PSI-6130, a cytidine analog. Roche further claimed that, because it had exclusive rights to sofosbuvir, it also had an exclusive license to a patent covering sofosbuvir, and that we infringed that patent by selling and offering for sale products containing sofosbuvir. Gilead and Gilead Pharmasset LLC filed their response to Roche's arbitration demand in April 2013. The arbitration hearing was held in New York in June 2014.
On August 14, 2014, the arbitration panel determined that Roche failed to establish any of their claims and ruled in favor of Gilead. As a result, Roche is not entitled to any damages or other relief. (Emphasis added)
Gilead has repeatedly expressed confidence in its patent position regarding Sovaldi. For what it's worth, I anticipate that it will run the table on the remaining challenges to its right to market all sofosbuvir/Sovaldi products. (That's a guess. I cannot know what will happen and do not profess any expertise about the pending challenges to sofosbuvir/Sovaldi.)
Negative articles about Gilead and Sovaldi are often seen. Gilead is more than hepatitis C or even hepatitis C plus HIV treatments. For example:
TheStreet.com just ran a one-sided piece that prominently included discussion of its newly-marketed drug for treatment of advanced CLL and two types of lymphoma, Zydelig (idelalisib). The author said:
The recent FDA approval of Gilead's Zydelig was actually a positive for Pharmacyclics (NASDAQ:PCYC) and Imbruvica...
That may be a stretch. I think a rejection of Zydelig would have been a positive for PCYC.
Imbruvica is approved for CLL and like Zydelig is given orally. Both Imbruvica and Zydelig are trailblazers in treating these B-cell malignancies with oral meds. However, while the author goes on to make some fair points, he neglects to point out that Zydelig is approved for two types of lymphoma which Imbruvica is not approved for, and these two are a good deal more common than mantle cell lymphoma, for which Imbruvica is approved along with CLL.
An argument against TheStreet's emphasis on Zydelig's black box warnings is that their article does not highlight the basic fact FDA approval means that it has weighed the risks and benefits of a drug product and finds it safe and effective for the stated indications.
Zydelig's current use will be in terminal cancer patients. Oncologists are used to giving toxic drugs even to non-terminal patients. The black box warning does not strike me as a deal-breaker.
What actually might happen at first, I hypothesize, is that Imbruvica failures in CLL (it is not known to be a cure, though we can hope it could be for some patients) may then be given Zydelig, while separately Zydelig is given for the forms of lymphoma for which it is now indicated.
Also, the details in the prescribing information that a physician sees, point out that the complications noted in the Zydelig black box were generally also seen with placebo-treated patients.
Thus, only wider, clinical experience with Zydelig will delineate its place in treatment. It's just not known yet whether Zydelig has important side effects that are frequent and serious enough to cause oncologists to avoid it, or whether the black box warnings might even be removed.
Meanwhile, despite the increase in short selling and various negative commentary about Gilead and GILD stock, the mother's milk of stock investing, EPS, is trending in a strongly positive direction for GILD:
EPS Trends Current Qtr.
Current Estimate 1.90 2.29 8.02 9.32 7 Days Ago 1.88 2.31 7.89 9.25 30 Days Ago 1.59 1.87 6.55 8.10 60 Days Ago 1.50 1.77 6.28 7.78 90 Days Ago 1.49 1.76 6.17 7.68
This is occurring when negative comparisons, or earnings disappointments, are hardly rare in listed stocks. Gilead is a standout here. Gilead's website provides consensus EPS estimate out to 2016. Analysts are around $10.20. A modest for P/E of 12X suggests that $120 is a conservative (though not hair-shirt) trading price for GILD a year or so from now. Even if it trades at $120 in two years, a 2-year C.D. yields approximately nothing, and GILD would still beat that by a lot.
Risks: I like to curb my enthusiasm and think of the risks in every stock I own. There is lots of leverage on the long side in the stock market overall. Specifically for GILD, the stock is now up about 5X since the Pharmasset acquisition was announced. Competition is coming, and Gilead is going to be second to market (at best) in Japan. Financial troubles in the large prospective markets for hepatitis C in Italy and Spain could hurt its net sales there. Gilead's pipeline might be unproductive going forward.
There are clearly significant risks to GILD at the all-time high price in the high $90s.
Further discussion - historical context, and conclusion: Let's think back to the late '90s. What valuation would GILD have had in that optimistic time? The stock would, I think, almost certainly be at or above $200 by now with what's been going right with the company. There would be puff pieces everywhere. CNBC would be going gaga over it. And so on.
There's a point to the above: those days may come back. And they may come back while Gilead is still knocking the proverbial cover off the ball. So who knows what the upside for GILD in the current up-move is, just given the "known knowns," much less the possibility that positive surprises could occur along the way?
Right now, the presumably sober team at S&P Capital IQ have their one-year target price and fair value estimate both at $150 for GILD. This makes this momentum stock amongst their very most undervalued stocks by their estimate. This is a disparity that may not last long.
On April 23, Seeking Alpha published my article titled Sovaldi's Q1 Is A Home Run With Men On Base; Why Gilead May Triple From Here. The stock was $73 when I wrote that. The stock is in the high $90s as I write this, and my proposed triple then is closer to a double than a triple if the target price stays the same. However, the newsflow has gone well for GILD since then. So at the least, my optimism about its future trading price remains unchanged.
Gilead Sciences has demonstrated that it can identify, and turn into large profits, important unmet needs in medicine. There is no obvious reason why this ability will suddenly end with the treatment of hepatitis C. But I think that the current stock price could well undervalue the present value of its existing products - and who thinks that the pipeline and other products to be named later will not also prove profitable?
I remain heavily overweighted in GILD shares, plus some out-of-the-money naked LEAP calls on GILD as kickers.
As far as the tens of millions of shares of GILD that have been sold short, I can only say to the short sellers: thank you.
Additional disclosure: Not investment advice. I am not an investment adviser.