Cheap Heroin: Gilead's X Factor

| About: Gilead Sciences, (GILD)

Summary

America's Prescriptions for Opioids has skyrocketed in the past decade.

Prescription Opioid Dependence is strongly correlated to heroin use and dependence.

Injecting Heroin and/or other Opioids is strongly correlated to Hepatitis C and HIV Infection.

Opportunists from Mexico, Afghanistan and elsewhere are flooding America with heroin.

Gilead will benefit more than any other company from the heroin epidemic.

America's opioid obsession in the past two decades is an overlooked X Factor that benefits Gilead Sciences, Inc. (NASDAQ:GILD) tremendously and will continue to drive sales growth of its Hepatitis C and HIV products for years to come. Indeed, this X Factor is a major reason that GILD often significantly beats earnings estimates quarter after quarter and will likely beat expectations again for Q1 of 2016.

The scientific evidence and the logic are compelling and straightforward. The use of prescription opioid painkillers has risen rapidly and steadily since 1999. The use of opioid painkillers is highly correlated to the use of heroin, especially since cheap heroin has flooded the United States since 2010. The use of injected opioids is directly correlated to the contraction of both hepatitis C and to a lesser extent HIV. Gilead's current product line leads in treatment of both of these diseases.

America has an Opioid Obsession as the use of prescription opioid pain killers has soared in the new century. According to the American Society of Addiction Medicine's Facts and Figures on Opioid Addiction for 2016: ASAM

Drug overdose is the leading cause of accidental death in the U.S. with 47,055 lethal drug overdoses in 2014 driven mostly by opioid addiction. 18,893 overdose deaths were related to prescription pain killers and 10.574 deaths related to heroin use.

In 2012, 259 million prescriptions were written for opioids--more than enough to give every American adult their own bottle of pills. Four in five new heroin users started out by misusing prescription painkillers. The rate of heroin overdoses showed an increase of 6% per year from 2000 to 2010, but from 2010 to 2013 the increase per year has been 37%. A 2014 survey of people in treatment for opioid addiction said that they chose to use heroin because pills were "far more expensive and harder to obtain."

Perhaps the scariest statistic is that among U. S. adolescents 12 to 17 years old in 2014 467,000 of them were current nonmedical users of opioid pain relievers and an estimated 28,000 had used heroin. Clearly, youth have easy access to opioids since they are ubiquitous now in the U.S.A

In a press release from the Center for Disease Control on July 7, 2015 from a telebriefing given by CDC Director Tom Frieden said:

"Heroin use is increasing at an alarming rate in many parts of society, driven by both the prescription opioid epidemic and cheaper, more available heroin." "There are by the best estimate a little over 500,000 people who are addicted to heroin in the U.S."

Statistics cited by Dr. Frieden in this address from data from the National Survey on Drug Use and Health from 2002-2013 shows that

hepatitis C nationwide grew 273% from 2009-2013. More than 19,000 people died from hepatitis C in 2013, up from 16,235 in 2009. Injected drug use is the primary risk factor for contracting hepatitis C in the USA. CDC

This author has attended trainings related to addiction in which the addiction experts state that prescription opioids are highly addictive and once a person is addicted to a substance, tolerance for that substance grows. In practical terms, the addicted person needs higher doses and/or stronger forms of the drug to maintain the same effect. When it comes to opioid abuse, what tends to happen is a start with pills, then a move to attempting to snort or inject the crushed pills to get a stronger high. As drug makers have made this more difficult and more expensive to achieve, heroin has filled the void as the much cheaper strong alternative. It is no coincidence that, as noted above, 4 out of 5 new heroin users in 2012 stated that they started with prescription pain killers.

The heroin epidemic X Factor is an overlooked reason that GILD's fundamentals continue to be extremely strong and that its stock rates favorably with the highest 5 star rating by S&P Capital IQ and an 8 out of 10 by Reuters. At a P/E of 8.1 and excellent growth prospects, GILD made both of my model portfolios based on slightly different criteria. One portfolio focused on highly rated stocks that could qualify as both growth and value plays: Hybrids. The other portfolio focused on highly rated (high quality) stocks that have a low short interest for their sector: Valentine. GILD was one of a handful of stocks that made both portfolios. In fact, GILD excelled toward the top of each model portfolio.

One need not wait to invest in GILD until it makes a major purchase as some seem to believe. Gilead will continue to beat expectations well into the future as the market is missing an essential growth driver for the company's products. America's Opioid Obsession has led to an influx of cheap heroin which, unfortunately, has made for no shortage of new HCV cases and, to a lesser degree, HIV cases. This author hopes that the U. S. can turn this extremely negative trend around, but fears that the trend of increased injectible heroin use will take at least three years to begin to reverse. In terms of large biotech companies, Gilead Sciences is well positioned to benefit from this disturbing societal trend.

Disclosure: I am/we are 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.

Additional disclosure: I have a small position in GILD to which I may add within the next 72 hours.