The Gilead Puzzle: Buy, Sell Or Hold?

| About: Gilead Sciences, (GILD)


Gilead is Puzzling: both respected and reviled, record profits but a flat share price.

HRC's and other politicians' attacks on GILD are disingenuous.

Gilead stock is currently a Strong Buy for the patient mid to long term investor.

GILD has an X Factor that will support its revenue strength.

Gilead's Hepatitis C drugs Sovaldi and Harvoni have made Gilead Sciences, Inc. (NASDAQ:GILD) highly respected while simultaneously the most reviled large biotech company in the United States. Gilead the company has been reaping record revenue over the past 12 months, yet the stock price has been flat. How has both the company and the stock achieved this confusing status? Here is a brief review of recent history:

First of all, Gilead management made a great call by purchasing "Drug candidate PSI-7977" before it became an approved drug from a small company named Pharmasset in January of 2012. At the time, many criticized Gilead for paying far too much, $11.2 billion, for the unproven assets of Pharmasset. It should be noted that nothing Gilead purchased from Pharmasset had FDA approval so this was certainly a calculated risk, but Gilead management had done its due diligence. Gilead renamed PSI-7977 sofosbuvir and took the compound successfully through FDA approval and then to market as Sovaldi and more recently in combination with the drug ledipasvir as Harvoni.

But the company has come under relentless attack for the high price of its two new drugs, even though GILD has negotiated significantly lower pricing in the past year with insurance companies and the United States Federal Government. This, along with bad press from many sources saying that the company is relying too heavily on profits from this one new drug and its combinations, has led the share price to slightly underperform over the past 12 months despite the company raking in record profits. Below are two examples of what some would call Gilead bashing by both the Fair Pricing Coalition and Hillary Clinton.

Date: December 3, 2015 - The US Senate Finance Committee ranking member Ron Wyden (D-OR) and senior committee member Chuck Grassley (R-IA) issued a scathing bipartisan investigative report on December 1, 2015, revealing a Gilead Sciences, Inc. pricing strategy showing little concern for patient access to its lifesaving drugs Sovaldi (sofosbuvir) and Harvoni (ledipasvir/sofosbuvir).

"The report, which took 18 months to complete, is amazingly thorough and comprehensive, worthy of the US Senate and a Pulitzer Prize for investigative reporting," said FPC co-chair Lynda Dee.

Sovaldi was approved by the FDA on December 6, 2013-a first-in-class hepatitis C drug that helped usher in a new era of short-course, all-oral, well-tolerated, and highly curative treatment.

The Senate report also provides clear evidence of Gilead's greed and blatant disregard of stakeholder insight, stating: "Based on all of the information reviewed, it appears that in pricing its line of [hepatitis C] drugs Gilead may have underestimated the warnings of patient groups, insurers, health care providers, and other organizations about the potential impact that price would have on access…While publicly saying it prioritized patient access, Gilead set Sovaldi's price at a level where ultimately many patients would not receive treatment. Sovaldi was on the market for almost a year without serious competitors, allowing Gilead to maintain a high effective price despite efforts by many payers to negotiate volume or treatment discounts or rebates."

Here is the link to the entire article:

The full U.S. Senate Committee Report can be seen here.

On December 29, 2015 in New Hampshire, Hillary Clinton campaigned to stop what she called drug speculators like Turing's Martin Shkreli and, by implication, Gilead:

"Some of you have heard about this pharmaceutical company where the guy's now been indicted-Turing-right? Well what he did was go out and find a drug that people had to have to survive... mostly for AIDS patients but not totally," she said. "So he buys a company that is selling this drug and overnight increases the cost from $7.50 a pill to like $750 a pill... We can't let the speculators buy drugs" with expired patents and "increase the cost like that."

Clinton later referred to Gilead although not by name:

"Apparently, hepatitis C is incredibly prevalent in Egypt. So the drug manufacturer made a deal to sell very, very cheaply in Egypt. Which is great," Clinton said. "But the drug is so expensive that a lot of states can't afford it in Medicaid and a lot of private insurance companies can't afford it. So here we are once again a company came up with a great lifesaving curative drug that we had something to do with and they're willing to sell it at a really cheap price nearly anywhere else but here. We can't let that go on."

In a comment here on an SA article by Shock Exchange on December 2, 2015, contributor Juan Garcia asks two pointed questions and then makes a point about comparative large biotech company profit margins:

"So Gilead is the only one that gets punished? What about Celgene gross profit at 95%, or Biogen at 88% or AbbVie and Pfizer at 82% or Roche at 81% or Amgen at 82%? The Gilead profit margin is at 87% or close--I see profit in-line w/the group."

The reply by SA member Dothemathman is telling:

"Juan: This is not about economics or fairness. This is just headline risk in the worst possible environment of an election year. I think Gilead is at least dead money for a year, and it could be worse than that. I love the company and I love their science and devotion to the science, but one should not love the stock, I think"

While I fundamentally agree with Juan Garcia, Dothemathman certainly gets to the crux of the bearish argument for GILD in 2016. If one wants to read well thought out bearish arguments in full then read all of Shock Exchange's articles on Gilead over the past several months here on SA. This author certainly points to the risk of investing in Gilead right now. Up until now, the share price of Gilead indicates that the bearish views have won the day to date. However, 2016 has just begun and Gilead stock's metrics certainly look highly appealing. In fact, when I did two different portfolios four months apart using two slightly different screens for "high quality stocks" to buy in 2016, Gilead rose to the top of each portfolio. The first article, written in mid October 2015 was the "The 2016 Growth/Value Hybrid Portfolio Top Ten"

The second article, written in mid February was the "Valentine 2016 Portfolio: Stocks to Love and Hate."

Here is what I said about Gilead in the latest article:

"Gilead: much like Apple, Gilead has virtually everything going for it in terms of the criteria and its valuation: 5 Stars from Standard and Poor Capital IQ, Thomson Reuters 8 of 10, short ratio of 1.4, short float 1.5% and an incredible P/E for the biotech sector of 7.4. GILD pays a 1.96% dividend to boot. Gilead has its detractors who point out that its share price in 2015 was flat and that its sales margins will be falling, especially with its high priced HCV drug(s). To me, those factors seem more than priced in, but that's another article."

The basic bear argument against GILD is that Gilead's current cash cows: Harvoni and Sovaldi will see revenue drops in 2016 due to both political pressure on pricing and due to competition, as both AbbVie and Merck now have approved competing drugs to treat Hepatitis C. Critics also seem to believe that Gilead's pipeline is weak.

My basic thesis regarding GILD stock is mid to long term bullish. When it comes to the political forces taking shots at the company, much of this is disingenuous. Certainly, Hillary Clinton linking GILD to Martin Shkreli and Turing is nothing short of disgraceful. It's not comparing apples to oranges, it's comparing apples to cow pies. The Wyden-Grassley reports aren't much better. They cite completely one-sided information blaming Gilead for keeping Sovaldi and Harvoni out of the hands of patients while not acknowledging the government's role in negotiations. The report also cites high costs while not crediting Gilead for actually having a cure for a terrible disease that has cost patients and insurance companies far more than $95,000, not to even mention the costs of pain and suffering, lost wages and the suffering of families. One would think that the Wyden-Grassley report might mention that a cure for Hepatitis C would result in high expenditures for several years, but would eventually save the government money. There is no such mention even though the price of Sovaldi and Harvoni are now much lower for Medicare and Medicaid than the list price. Again, this points again to politicians being disingenuous. Imagine that!

In my opinion, GILD stock is likely the best large company bargain on the stock market today. The company continues to smash earning expectations every quarter and it's P/E has dropped to below 8. GILD now has a growing dividend above 1.9% and the company is aggressively buying back stock in 2016. Short term, the political and media headwinds along with the recent launch of a Merck's new HCV drug could continue to hold the share price down. But GILD's Harvoni and Sovaldi will continue to be the Gold Standard of HCV treatment and cure.

When AbbVie got its new HCV drug approved, many bears warned that this lower priced alternative would undercut Sovaldi, but the Viekera Pak sales have been quite disappointing with Sovaldi and Harvoni remaining the Gold Standard of Hepatitis C treatment/cure with relatively few side effects. I predict that Merck's new drug Zepatier will follow a very similar path to AbbVie's Viekera Pak. It will show some sales, but Sovaldi and Harvoni will continue to be the treatment of choice. Harvoni and Sovaldi are definitely the current Gold Standard in terms of efficacy, safety and convenience.

While competition. insurance negotiations and public pressure have moved the average treatment price per patient down in the past 18 months to approximately $55,000 per patient in the U.S. and other industrialized countries, Gilead's profits continue to outperform market expectations every single quarter. Management currently has a tremendous amount of cash at its disposal that it can use to purchase the next potential blockbuster, while simultaneously increasing its dividend and buying back shares.

If one is a patient investor with at least an 18 month timeframe, then I believe that buying GILD stock is currently an extraordinary opportunity. I believe that this company actually has an X Factor that will help support it's record profits. I'll reveal that X Factor in my next article on the company. Hint: this X Factor is not related to purchasing another company or compound.

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.

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