Gilead: This Baby Has Been Thrown Away With The Bathwater

| About: Gilead Sciences, (GILD)
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Contenders (those with fundamentals) vs. Pretenders ( development stage biotech companies).

All Biotech stocks are not the same.

Below market PE multiples indicates there is no "bubble" here.

Indiscriminate selling equals opportunity.

Not without controversy but opportunity outweighs the risks.

The Biotech sector has been under severe pressure lately and it seems to make the "headlines" daily as the cause for so much of the NASDAQ weakness.

Yes the index (NASDAQ:IBB) has skyrocketed after a breakout in Nov 2013 tacking on a 30% gain in a mere 3 month time frame . These types of parabolic moves usually end badly and this one is no different.

The index has now retraced 100 % of that recent breakout. As of this writing the now stands below that breakout level (212) trading @ 208. Select names within the group have chalked up even more impressive gains during the recent bull run and were ripe for a sell off.

However, now is the time to separate those that have real fundamentals and those that are in the early stages of development and were trading on "hope" & promise of future innovations with new drugs: "Contenders vs. Pretenders."

Typically when the sellers come in and decide the sector is in a "bubble" and stocks are totally overvalued, indiscriminate selling usually follows. And right on cue that is what is taking place in the sector.

There are three names on my radar that are in fact reasonably priced and in some cases have PE ratios BELOW the S & P multiple.

Celgene (NASDAQ:CELG) has a strong pipeline of drugs, including its blockbuster Revlimid. Their 2014 gross margins are near 95%, which is the best in the biotech industry.

EPS of $6.66 in 2014 and $8.75 are expected in 2015. With the present price of $136 the shares are now selling with a PE multiple of 20 for 2014 and 15 for 2015. Hardly bubble-like.

Amgen (NASDAQ:AMGN) is a world leader in the biotech industry, its hardly a development stage biotech. Analysts expect 2014 and 2015 adjusted operating margins of 41% and 42%, respectively, up from 37% in 2013.

EPS of $8.14 in 2014 and $8.65 in 2015, reveals the shares are selling @ 14x '14 earnings and 13x '15 estimates. Lower than the S&P. With the stock @ 113, it's worth a look.

However, the stock that has me most interested and one that I recently purchased @ $69.70 is Gilead (NASDAQ:GILD).

The company has come into prominence with its new drug Sovaldi. This drug is a breakthrough in several ways. It has brought 95% cure rates when used in combination with the appropriate other medicines, and that is a remarkable result for ANY drug. It is also an oral, once-daily medicine with few side effects. All in all, it can be considered a "game-changer" for the treatment of hepatitis C.

Experts have been quick to recognize Sovaldi as something special. For example, the American Association for the Study of Liver Diseases in conjunction with the Infectious Disease Society of America have incorporated sofosbuvir (the chemical name for Sovaldi) in their first-line treatment guidelines for initial treatment of hep C virus disease. Furthermore, Sovaldi could be the most successful launch of a new drug ever, as the initial scripts for the drug have been enormous.

However Gilead is not a one trick pony, as they also have a nice pipeline of drugs. It is clear that they too are not a 'development stage" biotech company.

Of course, many "new" developments of this type do not come without controversy.

Pricing of Solvadi has come under scrutiny. First, with of all things, Congress. As Henry Waxman takes his posturing to new levels, condemning Gilead's pricing structure for the drug.

Not to be outdone and jumping on the pricing bandwagon was Express Scripts, as it announced that it would block reimbursement for the treatment.

Then there was the announcement that Merck has a drug to compete with Gilead that is currently in Phase II trial.

Then let's not forget the most important factor here, as it appears that Mr. Market has lumped ALL biotech companies into one basket.

That "perfect storm" of negative news hit, and Gilead shares have come down approximately 20% from it's February high.

Now for the fundamentals - operating margins of 52.8% in 2014 will be up from the 44.5% level in 2013.

EPS of $3.72 for 2014 and $5.68 for 2015 makes the shares attractive at 17x '14 and 11.7x '15 estimates.

I mentioned the negative developments that have added to the sell off and believe they will in fact 'fade away" as fast as they came.

On the topic of pricing, Mr Waxman did nothing but grandstand his case and the Express Scripts 'pushback" on pricing was of course in THEIR best interest and apparently they could care less about patients. Since this drug has a proven efficacy rate of 95%, the doctor, patient and entire biotech industry will battle vehemently to provide this drug to patients. In the end, I believe this will be a muted or a complete non-issue.

As far as other competition being announced, these competitors are in the early stages of development and IF they become viable drugs in this category, the successful Sovaldi launch will be well in place and possibly positioned to be THE treatment for this disease. The evidence presented to date surely presents a solid case for that. And, as have been shown in other successful drug launches, competition will come, but as in those same cases there is plenty of room in these markets for all to prosper.

So while these "risks" are surely present, it is my belief that the opportunities presented here far outweigh those risks. With the stock now down 20% and clearly not euphorically priced given the fundamental story, Gilead is a baby that truly has been thrown away with the bathwater.

While there are truly bubbles in Biotech, the stocks I put forth here clearly are not in that category and are all worthy of a good look.

With my recent purchase of Gilead, I now have exposure to a quality name in this sector, and suggest it is a group investors should consider as a great addition to a diversified portfolio.

Note: Gilead earnings will be announced on April 22nd.

Stay tuned.

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.

Additional disclosure: I am long numerous equity positions all of which can be seen here on my SA instablog. Please be advised : "It is my intention to present an introduction to this security and state my intent and position. It should be used as a 'Starting Point' to conduct your own Due Diligence before making any investment decision."