Before the market crash of sorts a few weeks ago, Gilead Sciences, Inc. (NASDAQ:GILD) was one of the top performing stocks. The stock price increased 22.66% before August 17th from the start of the year, offering a healthy return to investors. Even then, the stock price was undervalued. I Know First argued at the time that the overall market could see a pullback, but Gilead Sciences was still a strong investing opportunity for the long term.
Figure 1. Source: YCharts
The investing opportunity is even greater now, as the stock price has fallen to very reasonable levels. With a strong core business, strong management, and the recent opportunity, Gilead Sciences represents a very strong buying opportunity for long-term investors at this time.
HCV Business Still Strong
Much of Gilead Sciences success during the past year can be attributed to its HCV drugs Harvoni and Sovaldi. The company established its position in this field in 2013, and has secured itself a leadership position in the market. These drugs have caused earnings to grow rapidly over the past couple of years, leading to the strong stock performance.
Figure 2. Source: cnbc.com
Whether the company can keep sales of these two drugs up has been a main debating point about the future stock price. AbbVie Inc. (ABBV) introduced its own drug in the HCV market, while Merck & Co Inc. (MRK) is expected to potentially challenge Gilead Sciences dominance in the market in the future.
Concerns have built up as recent data has shown that prescriptions for HCV scripts have slowed down. These concerns are still overblown, though, especially considering the drugs have gained approval in the Japanese market. These drugs are expected to contribute $19 billion in sales during the current calendar year.
Further, Gilead Sciences is continuing to work to maintain its dominance in the HCV market with new drugs that will continue giving it an advantage over the competition. Recently, the company had successful phase three testing for a combination therapy for the treatment of all six hepatitis C genotypes. Gilead Sciences has submitted this drug combination to the Food and Drug Administration (FDA) for approval during the fourth quarter of the current year, helping the company continue to hold off competition in the market.
Meanwhile, the dominance of the market in the future will be reliant upon developing a drug that cuts the treatment duration to four weeks. Gilead Sciences has a head start in the market, and should prove capable of maintaining its dominance in the market. The fact is, the HCV franchise is currently very strong and should continue to grow moving forward.
Other Reasons GILD Represents A Strong Investment
Gilead Sciences' domination of the HCV market played a large role in the stock price surging before the market crashed, and it will continue to help the company earn massive amounts of free cash flow moving forward. Exiting the second quarter of the year, the company had $14.7 billion in cash. This amount was up from $11.7 billion at the end of 2014, and up from $2.57 billion coming out from 2013, and this amount should continue to grow as the HCV business continues to thrive.
The company has taken a shareholder-friendly approach recently, authorizing a $15 billion worth of shares last year and instituting its first quarterly dividend this year. This dividend currently yields about 1.6%, but this should grow as Gilead Sciences is projecting sales of $29 billion for the current fiscal year.
Figure 3. Source: YCharts
While the company is creating value for shareholders by repurchasing stock, it is also using that cash to diversify. Gilead Sciences has a strong pipeline, with 37 active clinical trials of pending regulatory approvals, including the one mentioned earlier for the new HCV combination therapy. While still boasting a leadership position in the HCV and HIV markets, the company is working to expand into new fields, such as hematology and oncology.
The large amount of cash can be used to buy up other companies, something it has been very successful at doing over the years. The company's biggest acquisition was the $11 billion purchase of Pharmasset, which brought the HCV Sovaldi to the company. While this was the biggest acquisition, it has also made a number of smaller purchases over the years.
The company has purchased 14 companies since 1999 for an average price of $467 million, and these have helped the company shore up its dominating position in the HIV market and launched new products in clinical trials for high-growth markets like oncology, where Gilead Sciences hopes to become a major player. The company's management has a strong track record, as the company's CEO John Martin has been in charge for nearly two decades now.
Valuation Represents Strong Opportunity
The company's strong performance in the HCV market, as well as in the HIV market, mean that Gilead Sciences should continue to thrive moving forward. These dominant positions have been held for a significant amount of time at this point, though, and investors might believe the chance for significant gains might have been lost. Indeed, a fair amount of profit taking has taken place recently as the stock fell in the recent pullback in the stock price.
In fact, just looking at the trailing price to earnings ratio over the last year shows how now is a great time to buy this stock, as the company's stock price fails to match its growing earnings. This valuation might make sense if the company's earnings were expected to stagnate or start falling moving forward, but this will not be the case.
Figure 4. Source: YCharts
While Hillary Clinton made waves mentioning that she would try to pass legislation to limit the cost of healthcare drugs if elected, this is unlikely, to say the least, as if she is elected, this will still be almost impossible to pass through Congress. With the amount of cash that the company is currently churning out, it is far more likely that earnings continue to expand, especially since the company's dominance of the HCV market continues.
Conclusion
Many of the concerns over Gilead Sciences, from its "waning" share of the HCV market to the potential of a price cap on its drugs, have been far overblown. This has presented a strong buying opportunity for long-term investors, as the company's dividend is likely to offer significant growth moving forward. Further, the current stock price does not match the massive earnings of the company, and these earnings are likely to grow based off of the company's successful track record of developing new, ground-breaking drugs. With a proven management team and a strong pipeline, I Know First algorithm continues to be bullish over the long term, with our algorithmic analysis agreeing with the fundamental analysis moving forward.
