Gilead Remains A Speculative Stock At Best

| About: Gilead Sciences, (GILD)

Summary

The pipeline is mediocre at best in its current state, and management has yet to make any meaningful acquisitions.

Perhaps this latest Phase 3 failure for myelofibrosis is the wake-up call Gilead management needed to stir the M&A pot.

Despite the failure news, which tripped up the stock, Barron’s came out saying it might actually be bullish for Gilead that it keeps failing trials.

Another week has passed and I have made another small purchase in the speculative shares of Gilead (NASDAQ:GILD). Yes, you read that correctly: speculative. The pipeline is mediocre at best in its current state, and management has yet to make any meaningful acquisitions. Although the valuation of the pipeline is getting a bit more attractive, if nothing materializes from the pipeline or M&A, this stock is a speculation at best.

Analysts might claim that the valuation is attractive right now, but what it can be is a value trap as well. Only the test of time will be able to shed the light on the true identity of this biopharma company. Despite considering it a speculative play, I still believe it is important to comb through the news to identify what has changed.

The one main product that Gilead has in its pipeline that investors and analysts are looking forward to hearing about is their NASH product. The company is still in Phase 2 trials for selonsertib with a couple of studies reviewing it as a stand-alone product and as a combination with simtuzumab. Remember that NASH is nonalcoholic steatohepatitis, for which there is no treatment or cure at the present time. This is the blue ocean strategy product area that the company needs to focus on to excite investors again. But I don't believe enough R&D money is being thrown at it right now. The most recent results showed data that favored the combo product for patients with NASH and moderate to severe liver fibrosis.

In other biological product news the company recently completed two Phase 3 trials for their momelotinib product in head-to-head competitions with Incyte's (NASDAQ:INCY) Jakafi for myelofibrosis. The results were mixed at best. The first trial, SIMPLIFY-1, met the endpoint for non-inferiority for splenic response rate (or spleen volume reduction). However, the second trial, SIMPLIFY-2 failed to meet the endpoint of superiority for patients who were treated recently by Jakafi. This latest trial demonstrates that Gilead continues to have difficulty finding their own in-house blockbuster products and must rely on intelligence and IP acquired from M&A.

Perhaps this latest Phase 3 failure for myelofibrosis is the wakeup call that Gilead's management team needed to stir the M&A pot. One possible acquisition could be Incyte in a, "If you can't beat 'em, acquire 'em" kind of mentality. If management is really intent on deploying that cash they have on the balance sheet to create shareholder value this may be a good target, rather than buying back their own shares. Incyte is currently a $20.2B USD market cap company which may still be too expensive on valuation after the most recent jump in the stock price. But let's face facts, Incyte jumped higher after the election like every other stock and has jumped higher than that (up 5%) on the back of Gilead's Phase 3 failure. Incyte has great earnings growth projections at 143.4% for next year and 62.6% for the next five years, those are some daunting numbers when compared to Gilead's anemic earnings growth expectations. Gilead let Incyte get away from the valuation they should have bought it at perhaps during the summer.

Despite the failure news which tripped up the stock of Gilead Barron's came out saying that it might actually be bullish for Gilead that it keeps failing trials. In a post citing Piper Jaffray's works the optimism is predicated on the notion that the recent failure will actually inspire a complete overhaul of the R&D efforts and ignite M&A activity. In essence, they're calling for an identity change at the company that can create value for shareholders and patients. Yes the HIV franchise is growing and the HCV franchise is declining with the price to earnings valuation essentially not pricing in the growth of the HIV segment, but unless the company decides to split the businesses it means nothing. The deceleration of the HCV franchise and the R&D spend will certainly outweigh and overshadow the potential growth in the HIV franchise.

Now that President Elect Trump has been filling his cabinet spots he will begin to focus on Obamacare by potentially repealing the act. The details of any sort of plan have not yet been drawn up, but the broader scope is taking shape. The silver lining for drug manufacturers such as Gilead is that they will not be as vulnerable to "price gouging" rhetoric as would have been the case if Hillary was elected as president. Just this simple fact buoyed Gilead from any other significant declines. Aside from the main concern of declining top line numbers was the simple fact that Hillary may have been elected president, that in of itself was suppressing shares of Gilead. Should Gilead find a pharmaceutical nugget in its pipeline or make an acquisition it could be off to the races in 2017.

I actually initiated my position in Gilead in early September of 2015 and have been pretty upset with the purchase thus far. So far I'm down 10.2% on an annualized basis but will continue to purchase shares as long as they are below $84 because I believe that is where it offers exceptional value. I've selected $84 because it is the average price at which I currently own my shares. But I do believe that it offers value until around $88 which happens to be the midway point of the 52-week range.

When it is all said and done, it matters what the stock has done in an investor's portfolio. For me, Gilead is my largest position and has been horrible as I'm down 12.7% on the name including reinvested dividends, while the position occupies roughly 18.7% of my portfolio. I continue to believe in it as a wild card name because it has been beaten down significantly. I own the stock for the wild card portion of my portfolio, and I will continue to hold onto the stock for now. My portfolio is up 9.9% since inception, while the S&P 500 is up 6.4 %. Below is a quick glance of my portfolio and how each position is performing. Thanks for reading, and I look forward to your comments.

Company

Ticker

% Change incl. DIV

% of Portfolio

AbbVie Inc.

(NYSE:ABBV)

3.23%

4.01%

Eaton Vance Corp

(NYSE:EV)

2.98%

4.89%

Electronic Arts Inc.

(NASDAQ:EA)

2.64%

3.63%

V.F. Corporation

(NYSE:VFC)

-0.15%

5.14%

General Electric Company

(NYSE:GE)

-0.36%

4.73%

Starbucks Corporation

(NASDAQ:SBUX)

-0.54%

4.72%

The Home Depot, Inc.

(NYSE:HD)

-1.12%

4.69%

Facebook, Inc.

(NASDAQ:FB)

-3.48%

8.74%

Skyworks Solutions Inc.

(NASDAQ:SWKS)

-4.52%

9.10%

Diageo plc

(NYSE:DEO)

-9.20%

6.90%

Gilead Sciences Inc.

-12.69%

18.67%

Silver Wheaton Corp.

(SLW)

-22.41%

4.49%

Cash

$

20.30%

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

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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