Why Gilead Is The Best Value Stock In Pharma

Oct. 03, 2021 8:13 AM ETGilead Sciences, Inc. (GILD)ABBV, AMGN, NVS, PFE70 Comments

Summary

Gilead has a moat-worthy stable of high-value drugs and generates respectable margins.
Yet, it trades cheaply compared to its large pharmaceutical peers.
Recent acquisitions pave the way for Gilead to expand beyond its key HIV and HCV franchises and into emerging cell therapies.

Maker Of Coronavirus Trial Drug Remdesivir, Gilead Sciences. Inc., Reports Positive Data Coming From Trials — Justin Sullivan/Getty Images News

Pharmaceutical companies are often perceived as being risky plays, due to patent cliffs that they face on existing drugs. That's why it pays to stick with the "big boys" in this space, because they have the resources and the sales force to either acquire or partner with smaller firms to bring new drugs to market.

Such I find the case to be with Gilead Sciences (NASDAQ:GILD), which appears to be cheap, even in the relatively inexpensive pharmaceutical segment. In this article, I highlight what makes GILD a sound income and growth Buy in this overall frothy market, so let's get started.

Why GILD Is A Buy

Gilead Sciences is a large-cap biopharmaceutical company that's been in operation for more than three decades, with presence in more than 35 countries worldwide. It's best known for producing medicines that treat life-threatening diseases, including HIV, hepatitis B and C, and cancer. In the trailing 12 months, Gilead generated $26.6B in total revenue.

GILD's solid drug franchises in the HCV and HIV categories translate into high profitability for the enterprise. This has earned GILD an A+ grade for Profitability from Seeking Alpha, driven by strong gross and EBITDA margins. As seen below, GILD's 53% EBITDA margin sits well ahead of the 6% sector median.

(Source: Seeking Alpha)

In fact, GILD's net income margin puts it solidly in the middle of the pack when compared to its big pharma peers. As seen below, GILD's net margin of 19.4% sits squarely above that of Novartis (NVS) and AbbVie (ABBV), and below that of Pfizer (PFE) and Amgen (AMGN).

(Source: YCharts)

GILD's strong margins are driven by its HIV and HCV portfolio, which requires only a small sales force and is inexpensive to manufacture. The market, however, does not appear to be giving GILD much credit. Doing an apples-to-apples EV/EBITDA comparison, GILD current trades at the cheapest multiple among the same aforementioned peers. As seen below, GILD's EV/EBITDA ratio of just 7.9x sits at the bottom of this peer group, and below the 9.0x of the next to last, Pfizer.

(Source: YCharts)

GILD is demonstrating strong execution, growing total product sales by 21% YoY, to $6.2 billion during the second quarter. Notably, Veklury (commonly known as Remdesivir) drove much of the growth, due to its use in treating hospitalized COVID-19 patients. However, I'm encouraged by the results excluding Veklury, showing a still respectable 5% YoY revenue growth.

Meanwhile, the cash benefits that GILD is seeing from Veklury give it dry powder to invest in key growth areas, with respect to its growing oncology business. This includes the promising drugs Yescarta (from its Kite Pharma acquisition, for treatment of lymphoma) and Trodelvy (for breast cancer). As seen below, the cell therapies Yescarta and Tecartus (from the Immunomedics acquisition) are showing promising growth, with Tecartus growing by 32% QoQ, driven by high unmet medical need.

(Source: investor presentation)

This year may turn out to be a transformative one for GILD, as it seeks to expand its portfolio beyond its key HIV and HCV franchises, as noted by management during the recent conference call:

Moving to our clinical pipeline, 2021 is a catalyst heavy year for Gilead and we have delivered all of our key first half pipeline commitments. Among other milestones, we shared top line data from the highly anticipated ZUMA‐7 trial where Yescarta improved event‐free survival for second line Large B‐cell Lymphoma, or LBCL, patients by 60% compared to the standard of care.

This is truly a landmark trial - the first and largest reported Phase III trial readout that demonstrates the efficacy and safety of cell therapy, and we are excited by the opportunity to bring the potential benefits of cell therapy to patients in earlier lines.

Risks include patent expirations, not least of which includes generic competition to GILD's HIV and HCV franchises. Also, there is always execution risk, as the average cost to bring a drug to market is $800 million, with no guarantees of FDA approval.

However, I see GILD as having momentum on its side with respect to emerging cell therapies, driven by its Immunomedics acquisition. Meanwhile, GILD maintains a strong BBB+ rated balance sheet, with $6.8 billion in cash and short-term investments on hand, and a net debt to EBITDA ratio of 1.6x, which is below the 1.8x from the end of 2020. I also see management as being financially disciplined, as GILD carried a materially negative (-$5.1 billion) net debt balance as recent as 2018, before recent acquisitions.

GILD pays a respectable 4.1% dividend yield that's well-covered, with a low payout ratio of 39.7%, and a 5-year CAGR of 9.3%. I see value in GILD at the current price of just $68.56, with a forward PE of 9.6. While analysts expect EPS to decline by 6% next year, due in part, to an expected decline in Remdesivir, growth is expected to pick up thereafter with 5-10% annual growth in the 2023-2024 time frame.

Analysts have a consensus Buy rating on GILD, with an average price target of $76, and Morningstar has a fair value estimate of $81. Taking the average of the 2, I arrive at a price target of $78.5, implying a potential 19% one-year total return including dividends.

(Source: Seeking Alpha)

Investor Takeaway

Gilead has a moat-worthy stable of high-value drugs, and its profit margin compares favorably against some of its large peers. Looking forward, GILD looks to expand its portfolio beyond the key HIV and HCV franchises into emerging cell therapies for the treatment of cancer. Meanwhile, GILD pays a well-covered and growing dividend, and its valuation makes it look cheap compared to its peers. I see value in GILD for potentially strong long-term gains at the current valuation.

This article was written by

Gen Alpha

17.16K Followers

I am Gen Alpha. I have more than 14 years of investment experience, and an MBA in Finance. I focus on stocks that are more defensive in nature, with a medium- to long-term horizon.

I provide high-yield, dividend growth investment ideas in the investing group Hoya Capital Income Builder. The group helps investors achieve dependable monthly income, portfolio diversification, and inflation hedging. It provides investment research on REITs, ETFs, closed-end funds, preferreds, and dividend champions across asset classes. It offers income-focused portfolios targeting dividend yields up to 10%. Learn more.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GILD either through stock ownership, options, or other derivatives. 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.

This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

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