There was a time, not too long ago, that I filled my portfolio with dicey biotech stocks, betting on the most speculative of names with little regard for the volatility it could bring. Since then I have held large positions in Johnson & Johnson (NYSE:JNJ) only, mostly because of its leading presence in both pharma and consumer goods. My only speculative biotech holds are Acadia Pharmaceuticals (NASDAQ:ACAD) and Celldex Therapeutics (NASDAQ:CLDX), which combined account for about 3% of my total portfolio. Outside of pharmaceuticals, I also own large positions in Walgreen and Rite Aid to round out my healthcare holdings. Therefore, with five stocks in the healthcare space, I had told myself that no more new positions would be added, that was until Gilead Sciences (NASDAQ:GILD) just presented an opportunity that was too good to pass up.
The stock tanks
As everyone knows, Gilead Sciences is the maker of the blockbuster Hep C drug Sovaldi, and the newly FDA approved single-tablet Hep C treatment Harvoni. Both drugs have very high cure rates for the disease, and during Gilead's last quarter, sales of Sovaldi were $2.8 billion, bringing its total sales to $8.5 billion over the last nine months. Meanwhile, for Harvoni's first quarter on the market, analysts expect sales to reach $1.8 billion.
Hence, these are enormous drugs for Gilead, very important to its stock, which is exactly why the stock responded so poorly to news that Express Scripts partnered exclusively with AbbVie to cover its newly approved Harvoni-competing drug regimen Viekira Pak. Express Scripts will drop Gilead's Harvoni coverage for its 25 million customers, and provide coverage on AbbVie's regimen in exchange for an unknown discount.
With this news, and Gilead losing Express Scripts coverage on its most promising drug, sales estimates are sure to be lowered, which is evident based on the stock's near 15% decline on Monday. That said, four things in particular attracted me to Gilead following this news.
Gilead already established
While AbbVie is sure to fork out 100s of millions in marketing and advertising dollars for Viekira Pak, Gilead already has nearly a year with its products on the market. This means that Sovaldi, and now Harvoni have established track records with physicians and patients, many of whom will be Express Scripts customers.
The fact that Gilead already has this network in place, including a first-to-market advantage, might bode well for the company. Who knows, with the U.S. currently in an insurance enrollment period, it is even possible that patients on a Gilead regimen, or soon-to-be, will switch their coverage to a provider that includes Gilead products. Thus, forcing members to use AbbVie's new product might actually work against Express Scripts, which leads to my second reason to buy Gilead.
Specifically, the news regarding AbbVie's partnership only affects Gilead's Harvoni, not Sovaldi. This puts Viekira Pak head-to-head with Harvoni.
Notably, Harvoni has essentially no serious side effects. Meanwhile, Viekira Pak has been linked to feeling tired, itching, being lethargic, nauseas and difficulty sleeping. Also, Harvoni patients take just one pill in the morning, easy to remember, while Viekira Pak's regimen of three pills in the morning and one at night (up to six pills daily depending on treatment) is much more rigorous.
Granted, both drugs have an exceptional high cure rate, 90% plus, the convenience and lack of side effects associated with Harvoni will certainly be attractive to potential patients, and physicians. This adds to the notion of patients and physicians disapproving of Express Script's decision to force one drug over the other, as patients who paying high monthly premiums will care less about how expensive the drug is for a company that's generated $8 billion in gross profit over the last year alone. Hence, there could be patient and physician backlash.
The price is right
Aside from reasons to invest in Gilead related to the AbbVie/Express Scripts news, the stock itself is attractively priced. The consensus EPS expectation for next year is $10.07, which is higher than the $9.45 that analysts expected 90 days ago.
Therefore, with the understanding that AbbVie's presence will take some business from Gilead's Hep C franchise, let's be conservative and assume that Gilead will earn $9.45 per share in 2015. If so, shares trade at just 9.8 times next year's earnings.
That makes Gilead the cheapest $100 billion plus company in the biotech or big pharma space. It's far cheaper than fellow growth companies like Bristol-Myers, which trades at nearly 34 times next year's earnings, despite the fact that Gilead is expected to grow several times faster than BMY. It's also cheaper than large companies like Pfizer that have been hit hard by the patent cliff, a stock that trades at over 14 times next year's earnings.
Therefore, one could suggest that Gilead is priced as one of the worst large companies in this space, a premium that does not match the fundamentals.
There's more to Gilead than Hep C
Lastly, and to conclude, while Gilead is often identified for its leading Hep C franchise, it is the leader in treatments for HIV. Truvada is its most well-known HIV product, creating sales of $875 million during its last quarter with growth of 8%, but Gilead has three other HIV products that are on pace to create well over $1 billion in annual sales during the next 12-months.
These include the combination Complera/Eviplera, which saw sales grow 57% to $330 million during its last quarter, and also Strbild, whose revenue skyrocketed 128% to $328 million in the third quarter. Further, Gilead has been developing an enormous, and highly promising pipeline in oncology for several years. Back in July it was granted FDA approval for its first drug in oncology, Zydelig, for the treatment of three different B-cell blood cancers. This further illustrates the diversity in Gilead's business, and the leading emphasis on research. As an investor who is seeking safety in the space at a good price, opportunities like Gilead at $93 a share just don't come around that often.
Disclosure: The author is long GILD.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.