I'm Sticking It Out With Gilead

| About: Gilead Sciences, (GILD)

Summary

Japan's Ministry of Health recently approved the company's Vemlidy for Hepatitis B.

But on the Hep B front there remains competition as ContraVir has expanded its Phase 2a clinical trials.

Competitors are not only battling Gilead on the Hep C and Hep B fronts, but they are also taking aim at the high growth area of HIV.

Perhaps with the markets closed for the long Christmas weekend, investors had a chance to think about their portfolio holdings and what they want to do with them for 2017. Those that are holding shares of Gilead (NASDAQ:GILD) were definitely thinking about what they want to do with their shares for 2016; do some tax-loss selling or keep the shares for 2017. I have debated this conundrum with myself and have decided to keep the shares for 2017 and that's why I think it is important to study the recent news to gain some perspective on the company.

Japan's Ministry of Health recently approved the company's Vemlidy for Hepatitis B. The importance of this is that Vemlidy is just as efficient as tenofovir disoproxil, but at just one-tenth of the dose. Currently, tenofovir disoproxil is sold in Japan by GlaxoSmithKline (NYSE:GSK). It is estimated that Japan has nearly 1M people infected with the virus. Though it seems like a small opportunity, it is important nonetheless as it offers Gilead the opportunity to steal market share from GSK. Patients having to take the smaller dosage is important because it keeps the bones and kidneys a bit healthier as it is less stressful to take a weaker dose.

But on the Hep B front, there remains competition as ContraVir (NASDAQ:CTRV) has expanded its Phase 2a clinical trials on their variant of tenofovir (exalidex or TXL) to include a strong dose of 150mg/day as opposed to 100mg/day. The study is pitting ContraVir's product which offers a lower toxicity rating against Gilead's Viread (or TDF). ContraVir has always been behind the 8-ball when it comes to competition against Gilead in the virology space and it may also be the case in this situation.

Competitors are not only battling Gilead on the Hep C and Hep B fronts, but they are also taking aim at the high growth area of HIV with the latest attack coming from ViiV Healthcare which is owned by a handful of big pharma names. The company recently announced the launch of a Phase 3 trial for their injectable product of HIV prevention. The study will compare the company's cabotegravir against Gilead's Truvada. The former product will be given at two-month intervals versus the once-daily orally administered Truvada. The end date for this study will be June 2020 for now. There are a couple of things to consider here:

The fact that cabotegravir is injected versus taken orally is important. Many patients begin to faint at the sight of a needle which can make this option less palatable (no pun intended because the other product is taken orally) for patients who then may choose to take Gilead's product. The other fact to take note of is that cabotegravir's value proposition is that it can be taken just once every other month versus once daily. This is important because the individual does not have to be constantly reminded to take a product on a daily routine, but also if they were taking it just every other month, may happen to forget about it and skip the regimen altogether. I somehow doubt that will be the case given the severity of the virus. But the injectable versus oral will probably play a bigger role in what the patient/doctor combo will prefer.

The biggest needle mover news that happened recently though was the fact that a federal jury found that Gilead must pay $2.5B to Merck (NYSE:MRK) for patent infringement while developing their HCV products. The $2.5B number came about as the jury decided that Gilead owed 10% royalties on $25.4B of sales coming from the blockbusters Harvoni and Sovaldi. However, the $2.5B may just be the start of the pain, as in this particular case, the judge has the ability to increase it by at most three times what it currently is. Gilead, however, is not taking this news lightly as it has vowed to appeal the decision. Despite Gilead having a large enough war chest to pay this fine, it will nearly destroy 10% of the company's cash position on the balance sheet.

With the market at record highs seemingly every day, the healthcare stocks which have been beaten down should provide opportunities for investors. However, Gilead has some major idiosyncratic issues that will impede its progress, most notably the final topic I discussed about the payment to Merck. Gilead is still a great large-cap company which has been under a lot of duress over the past eighteen months and investors will probably continue to sell it into the end of 2016 for tax loss purposes. At 7x next year's earnings estimates, the stock has not shown that it is a value play yet, but it can with one quick signature on the bottom line of an acquisition agreement.

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 8.4% on an annualized basis but will continue to purchase shares as long as they are below $83 because I believe that is where it offers exceptional value. I've selected $83 because it is the average price at which I currently own my shares. But I do believe that it offers value until around $87 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 10.9% on the name including reinvested dividends, while the position occupies roughly 19.8% 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 10.6% since inception, while the S&P 500 is up 8.9%. 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

Electronic Arts Inc.

(NASDAQ:EA)

7.72%

3.78%

AbbVie Inc.

(NYSE:ABBV)

4.39%

4.03%

Eaton Vance Corp

(NYSE:EV)

4.11%

4.91%

The Home Depot, Inc.

(NYSE:HD)

3.72%

4.89%

General Electric Company

(NYSE:GE)

1.90%

4.80%

Starbucks Corporation

(NASDAQ:SBUX)

-1.28%

4.65%

Skyworks Solutions Inc.

(NASDAQ:SWKS)

-2.19%

9.26%

Facebook, Inc.

(NASDAQ:FB)

-3.52%

8.68%

V.F. Corporation

(NYSE:VFC)

-5.11%

5.67%

Diageo plc

(NYSE:DEO)

-6.11%

7.88%

Gilead Sciences Inc.

-10.87%

19.79%

Silver Wheaton Corp.

(SLW)

-25.32%

4.86%

Cash

$

16.81%

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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