Gilead: Expect Focus On Products, Not Acquisitions

| About: Gilead Sciences, (GILD)

Summary

It is no secret that Gilead has been underperforming all year long against the broader market and its peers as the stock is down 28.1% so far.

It is not in the company's DNA to make a huge purchase.

The company is going to continue to focus acquiring pipeline products to try and hit the next home run.

Gilead (NASDAQ:GILD) continues its slide down into earnings as news of increased competition begins to creep up in all the sandboxes that it occupies. Long-term shareholders can't seem to catch a break in the name since about a year ago. With many perceived shots on goal with products in the Hep C, Hep B, AIDS, oncology, and NASH therapeutic areas one would think that Gilead has a pipeline filled with biotech gold to keep its stock price afloat, but that hasn't been the case.

Partners such as GlobeImmune are working hard in the Hep B space as it may be the next big thing after Hep C to be solved from a patient treatment perspective. Gilead will present an abstract on its work in the Hep B space at The Liver Meeting in about a month. Currently the company is running a phase 2 trial which will update earlier results from the same phase 2 trial where the results fell short of expectations for the 24 week checkpoint. Because the study is in phase 2 right now and showed disappointing results at the first check point it should carry no value in any sort of discounted FCF analysis. However, if these results show the required safety and efficacy required the product will likely proceed to a phase 3 trial and that is when we can begin to model the future cash flows of this product in any sort of FCF model.

Galapagos (NASDAQ:GLPG), which Gilead inked a major partnership with earlier this year, announced that they will begin a phase 3 study to assess filgotinib for Crohn's disease and phase 2b/3 study for ulcerative colitis. Gilead will lead the two campaigns to obtain regulatory approval and if successful investors may be able to see some increased cash flow for Gilead's ability to get the product approved.

But it isn't until a pipeline product advances to the next stage or competition fears ebb that analysts will stop riding the stock down as Leerink just did by downgrading the stock. The firm's analyst downgraded Gilead from a "buy" to "market perform" with a price target reduction of $18 to $94. Currently Gilead is just riding the waves of their Hep C and AIDS franchises and the analyst is pounding the bear drum on those revenue streams. The analyst argues that Gilead should have had better vision into the patient starts than anyone else on the street but yet the company blew it and that management may be startled by even slower patient starts going forward.

The Hep C franchise is also under attack from regulatory perspective now as the FDA recently stated that they want labels for Hep C products indicating the risk of reactivating Hep B in patients that are taking the Hep C products. Both Gilead's lead products Harvoni and Sovaldi are going to fall victim to the edict handed down by the FDA, but so will Merck's (NYSE:MRK) Zepatier and AbbVie's (NYSE:ABBV) Viekira Pak so the playing field will be leveled from that perspective. This request by the FDA may have an impact to the Hep C franchise but I believe it will be rendered immaterial at the end of the day since the labeling affects the products offered by the competitors as well.

It is no secret that Gilead has been underperforming all year long against the broader market and its peers as the stock is down 28.1% so far. It has all come at the hands of increased competition which has brought about a decrease in revenues for the Hep C franchise. But all this has been chronicled over and over again. Because they are curing their customers of disease they are "losing out" on customers and because the increased competition has flooded the hospitals with supply this is just a basic economics problem. Dwindling demand for the product with increased supply of the product just drives prices down and because Gilead was the king of the jungle it only makes sense that they are going to lose something out of the equation.

Though everyone is screaming at the top of their lungs for Gilead to acquire another company, over the course of its 28 year history, the company has made only sixteen acquisitions. The average purchase price of these acquisitions is at $1.2B and it is only that high because it paid $10.4B for Pharmasset. If you remove that anomaly from the equation then the average turns to $558M. Culturally, the leadership team does not make any acquisitions of great magnitude so to expect this current leadership team to come in and make a huge acquisition may just be a dream. They've been able to integrate Pharmasset very well, but there is no telling what can happen to the next company they acquire if it is a huge deal.

The Hep C products are losing momentum and I would expect the company misses its third quarter results but I continue to be a value investor however and purchase shares of Gilead. I actually initiated my position in Gilead in early September of 2015 and have been pretty upset with the purchase thus far. So far I'm down 12.9% on an annualized basis but will continue to purchase shares as long as they are below $86 because I believe that is where it offers exceptional value. I've selected $86 because it is the average price at which I currently own my shares. But I do believe that it offers value until around $91 which happens to be the midway point of the 52-week range.

A great way to enter the stock would be to write the November $67.50 strike put for $0.93 and using those proceeds to purchase the November $80 strike call for $0.75. The strategy offers an investor at least the chance to collect the premium and perhaps maybe even make a profit on the call which was purchased if there is a surprise in earnings because the November expiration covers the third quarter earnings call.

When it is all said and done, it matters what the stock has done in an investor's portfolio at the end of the day. For me, Gilead is my largest position and has been horrible as I'm down 14.4% on the name including reinvested dividends, while the position occupies roughly 15.6% of my portfolio. I continue to believe in it as a wild card name because it has been beaten down and offers value. I own the stock for the wild card portion of my portfolio, and I will continue to hold onto the stock for now. My portfolio is up 5.9% since the inception, while the S&P 500 is up 2.7%. Below is a quick glance of my portfolio and how each position is performing. Thanks for reading and I look forward to your comments.

Company

Ticker

% Change incl. DIV

% of Portfolio

The Priceline Group Inc.

(NASDAQ:PCLN)

25.98%

6.13%

Southwest Airlines Co.

(NYSE:LUV)

12.82%

11.91%

Electronic Arts Inc.

(NASDAQ:EA)

10.28%

4.04%

KLA-Tencor Corporation

(NASDAQ:KLAC)

2.64%

5.35%

Target Corp.

(NYSE:TGT)

-0.16%

7.78%

AbbVie Inc.

(ABBV)

-2.50%

3.16%

T. Row Price Group, Inc.

(NASDAQ:TROW)

-3.79%

10.93%

Diageo plc

(NYSE:DEO)

-6.72%

4.17%

Signet Jewelers Limited

(NYSE:SIG)

-9.57%

11.63%

Gilead Sciences Inc.

-14.44%

15.63%

Silver Wheaton Corp.

(NYSE:SLW)

-15.81%

3.77%

SIG OCT 21 2016 85.00 CALL (Open)

-84.52%

0.20%

DEO OCT 21 2016 120.00 CALL (Open)

-95.36%

0.02%

Cash

$

15.27%

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Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

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.