What Caused Gilead Sciences' Recent Rally

| About: Gilead Sciences, (GILD)
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Summary

Prescription data from Symphony Health indicates that sales of hepatitis C drug Harvoni rose sequentially in the first quarter of 2016.

Harvoni and Sovaldi prescriptions have increased for the fifth consecutive week while scripts for competitor Merck have started to fall.

Considering its compelling valuation metrics GILD's stock, in my opinion, is undervalued. Gilead's EV/EBITDA ratio is very low at 6.43, the second lowest among all 58 S&P 500 healthcare companies.

The average target price of the top analysts is at $112.36, an upside of 13% from its April 19 closing price, however, in my opinion, shares could go much higher.

Gilead Sciences (NASDAQ:GILD) stock has risen sharply in the last ten weeks, as a result of analysts upgrading the company. There was one up revision during the last seven days and five EPS up revisions during the last thirty days. Since its 52 week low of $81.89 on February 02, GILD's stock has climbed 21.4% to $99.44. However, the stock is still down 19.4% from its all-time high of $123.37 on June 24, 2015. According to TipRanks, the average target price of the top analysts is at $112.36, an upside of 13% from its April 19 closing price, however, in my opinion, shares could go much higher.

GILD Daily Chart

GILD Weekly Chart

Charts: TradeStation Group, Inc.

In my view, the recent soar in Gilead's shares makes sense since the stock is considerably undervalued, despite the fact that the company is continuing to do well. According to argusresearch.com, prescription data from Symphony Health indicates that sales of hepatitis C drug Harvoni rose sequentially in the first quarter of 2016. Harvoni and Sovaldi prescriptions have increased for the fifth consecutive week while scripts for competitor Merck (NYSE:MRK) have started to fall. This solidifies Gilead's dominant market share in hepatitis C drug sales and leads to believe that hepatitis C sales will be stronger in the first quarter of 2016 than expected.

Harvoni sales could also show substantial growth in Europe and especially in Japan. Harvoni was approved in Japan July 2015, and it seems that sales there are still trending higher. Already in the fourth quarter of 2015, Gilead's sales in Japan were about $1.5 billion almost 18% of total sales for the quarter. According to Gilead, it is the biggest, the number one and number two products regarding pharmaceutical in Japan in a short period.

Another key growth driver for the company could be Genvoya, a newer version of the HIV drug Viread that was launched in January. According to the company, scripts for Genvoya have increased in every week since its launch. Genvoya is a combination drug that includes a lower dosage of TAF, the antiviral component in Gilead's Viread, and two other ingredients. Genvoya has significant advantages over Viread because the lower TAF dosage helps to preserve patients' bone mineral density and reduces renal impairment. These are key safety considerations for patients who may take the drug for many years. According to some analysts, Genvoya has the potential to be a blockbuster product, with peak annual sales of more than $1 billion.

Last week, at The International Liver CongressTM 2016 in Barcelona, Gilead presented multiple HCV and HBV data, which demonstrates the company success in developing new applications for its compounds. The company announced results from several Phase 2 and Phase 3 studies evaluating its two investigational, pangenotypic, fixed-dose combination therapies for the treatment of chronic hepatitis C virus infection, as well as new data highlighting the potential use of Harvoni in adolescents aged 12 to 17. According to Gilead, the data continue to underscore the high cure rates and safety of its sofosbuvir-based HCV therapies and support their utility across all patient HCV genotypes and disease stages.

Also, at the Congress, Gilead announced data supporting the development of three investigational agents for the treatment of nonalcoholic steatohepatitis [NASH] and primary sclerosing cholangitis [PSC]. NASH is a serious liver disease resulting from the metabolic dysfunction that is associated with steatosis (fat within the liver), inflammation and fibrosis, which may progress to cirrhosis. Affecting up to 15 million people in the United States, NASH-related cirrhosis is expected to become the leading indication for liver transplantation by 2020. PSC is a disease characterized by inflammation and stricturing of the bile ducts. PSC can eventually lead to cirrhosis and other complications, including bile duct cancer.

Valuation

Considering its compelling valuation metrics GILD's stock, in my opinion, is undervalued. Gilead's trailing P/E is very low at 8.34, and its forward P/E is even lower at 7.98. The Enterprise Value/EBITDA ratio is also very low at 6.43, the second lowest among all 58 S&P 500 healthcare companies. Furthermore, the price-to-free-cash-flow ratio is extremely low at 8.27, also the second lowest among all 58 S&P 500 healthcare companies.

The 10 S&P 500 healthcare companies with the lowest Enterprise Value/EBITDA ratio

The 10 S&P 500 healthcare companies with the lowest price-to-free-cash-flow ratio

Source: Portfolio123

Gilead started to pay dividend in the second quarter of 2015. The forward annual dividend yield is at 1.73%, and the payout ratio is only 10.4%.

Summary

GILD's stock has risen sharply in the last ten weeks, as a result of analysts upgrading the company. There was one up revision during the last seven days and five EPS up revisions during the last thirty days. Prescription data from Symphony Health indicates that sales of hepatitis C drug Harvoni rose sequentially in the first quarter of 2016. Harvoni and Sovaldi prescriptions have increased for the fifth consecutive week while scripts for competitor Merck have started to fall. Considering its compelling valuation metrics GILD's stock, in my opinion, is undervalued. Gilead's EV/EBITDA ratio is very low at 6.43, the second lowest among all 58 S&P 500 healthcare companies. Furthermore, the price-to-free-cash-flow ratio is extremely low at 8.27, also the second lowest among all 58 S&P 500 healthcare companies. The average target price of the top analysts is at $112.36, an upside of 13% from its April 19 closing price, however, in my opinion, shares could go much higher.

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.