Is Gilead Sciences Still a Buy After the Recent Stock Rally?

With shares of Gilead Sciences (NASDAQ:GILD) trading at around $74.24, is it an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C – Catalyst for the Stock’s Movement

Gilead has made a fortune from realizing a simple fact: patients take their medications in the real world, not in a laboratory with PhDs and MDs supervising dosing schedules and side effects. Their fixed-dose combination pills Truvada and Atripla addressed this issue for HIV treatment, combining multiple HIV medications into a single pill. Consequently, they have been rewarded with an impressive market share in the HIV treatment market, and are now looking to have the same success in the treatment of Hepatitis C. Sofosbuvir, a novel Hepatitis C drug, recently demonstrated promising results in the first of several Phase 3 trials, with 78% of patients having an undetectable viral load 12 weeks following treatment.

There are two attributes of sofosbuvir which make it a potential game-changer. First, if approved by the FDA, it would be the first all-oral Hepatitis C treatment. Second, it avoids the use of interferon, a component of standard Hepatitis C treatments associated with a highly unfavorable side-effect profile. Half the patients that take interferon typically develop flu-like symptoms, and one-third develop psychiatric complications such as depression. These challenges in the current Hepatitis C treatment regiments have led to approximately one-third of patients discontinuing treatment. As an all-oral, low side-effect medication, sofosbuvir has the potential to sharply reduce this rate of non-compliance and, in doing so, establish itself as the dominant drug in the treatment of Hepatitis C. With the market for Hepatitis C treatments estimated at $20 billion, there is ample excitement over sofosbuvir as it progresses through Phase 3 trials.

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Gilead has also recently introduced another HIV drug, Stribild, that is poised to become a lead drug choice in HIV treatment. A four-drug combination pill that builds on the success of Gilead’s single-pill model, Stribild has been predicted to become the market leading HIV drug within the next decade. This addresses the well-known shareholder concerns over Gilead’s older HIV drugs losing patent protection.  Additionally, since Gilead produces all of the component drugs within Stribild, they would avoid the revenue sharing arrangements that have come with their previous HIV medications.

Gilead has also ramped up its research into oncology drugs, with several drugs in its pipeline being tested as treatments for colorectal cancer, pancreatic cancer and a specific type of leukemia. As Gilead’s market presence is largely centered around its Hepatitis C and HIV drugs, expectations for a thriving oncology division are low, and the potential success of these drugs is likely not built into the stock price. Nonetheless, if any of its experimental drugs in this division were to show promising results (the lead contender is currently a drug termed GS-6624 that is in several Phase 2 trials), it would be a welcome addition to Gilead’s product line…

E – Debt to Equity Ratio is Fair

Gilead’s debt to equity ratio of 1.028 could certainly be better, and while not as impressive as some of its larger competitors, in the world of bio-tech far higher ratios have become standard. They took on a substantial amount of debt (and spent a large portion of their cash) in the acquisition of Pharmasset back in 2011, in order to acquire Pharmasset’s coveted Hepatitis C pipeline (including sofosbuvir). They now have $1.695 billion in cash, $8.75 billion in book value and $8.993 billion in debt. While Pharmasset did not come cheap, Gilead’s bet on them appears poised to pay off.

T – Technicals on the Stock Chart are Strong

This past month, Gilead has gained over 11% while the S&P 500 lost 0.52%. Their numbers are particularly impressive over the past year.  YTD Gilead has gained over 82% compared to 14.96% for the S&P 500, and for the calendar year the stock has gained 89.44% compared to 16.35% for the S&P 500. Looking at the 3-year return, Gilead demonstrates a respectable return of 61.35% compared to 36.02% for the S&P 500.

At its close of 74.61 on December 3rd, Gilead is trading at 7.41% above its 50-day SMA of 69.61. It is 18.15% above its 100-day SMA of 63.15 and 33.29% above its 200-day SMA of $56.07.

E – Revenue and Annual Earnings Have Been Impressive

Gilead’s annual revenue and earnings have impressively grown over the last five years.

      2007       2008       2009       2010       2011
Revenue ($)in billions

4.230

5.336

7.011

7.949

8.385

Diluted EPS ($)

1.64

2.06

2.82

3.32

3.55

 

While profits this last quarter topped analysts’ estimates, they were down from the same quarter one year ago. But much of this decrease in profit was due to increased R&D costs, as Gilead invests in development of an extensive pipeline. Sales of Gilead’s lead HIV drugs have proven strong, as revenue increased 14% compared to the year-ago quarter.

     9/2011      12/2011      3/2012      6/2012      9/2012
Revenue ($)in billions

2.122

2.200

2.282

2.405

2.427

Diluted EPS ($)

.95

.87

.57

.91

.85

 

Trends Support the Industry

The progress that the pharmaceutical and healthcare industries have made in the last decade in the treatment of HIV has been…

remarkable, and the financial rewards for these advancement have proven to be substantial. Gilead continues to be at the forefront of delivering HIV treatments, and they have mastered the art of producing drugs that are both highly effective and easy for patients to properly dose. As multiple pharmaceutical companies compete to make these same steps forward in the treatment of Hepatitis C, Gilead’s acquisition of Pharmasset has positioned them well to also obtain a dominant role in this lucrative and growing market.

Conclusion

Gilead will likely continue to play a major role in the HIV treatment market, and is also the leading contender to develop a blockbuster Hepatitis C treatment that may lead to significant improvement in patient compliance. Their revenue and earnings have been strong, with temporary dips in quarterly earnings mostly from R&D costs. With average annual earnings growth over the last five years at 20.14%, their research costs have clearly been well-spent. While the debt to equity ratio is not ideal, their gamble on acquiring Pharmasset appears poised to have a large payoff down the road. As a company that has demonstrated continued dominance in the HIV treatment market, and is positioned to do the same in the market for Hepatitis C treatment, Gilead should OUTPERFORM in the long-run.

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