Gilead: Value and Growth

06/26/2014 8:00 am EST


Growth investors want big earnings gains, often regardless of price/earnings multiples, while value investors typically look for low P/Es and other valuation discounts; this biotech stock offers bargain-priced growth that should appeal to both types of investors, suggests Philip Springer in Personal Finance.

Gilead Sciences (GILD) is a biopharmaceutical company that develops and markets medicines to treat several illnesses. As the dominant company in AIDS treatment, its earnings grew modestly in the five years through 2013.

Its four drugs for AIDS (Atripla, Truvada, Complera, and Stribild) should generate $8 billion in revenues this year. And Gilead has numerous other drugs under development in a broad product pipeline.

But the big story for now is the December 2013 launch of Sovaldi, a drug for the treatment of hepatitis C, a chronic and life-threatening liver disease.

In this year’s first quarter alone, Sovaldi generated $2.3 billion in sales, exceeding even the most aggressive predictions. This resulted in a 97% revenue increase from the year-earlier period. Analysts expect Sovaldi to bring in anywhere from $5 billion to $9 billion this year.

Sovaldi is a controversial drug. Not for its efficacy, but for its cost—$84,000 for the standard 12-week regimen. But the treatment has been so effective that it evidently cures the patient and eliminates the need for further, long-term treatment, including a possible liver transplant.

In other words, despite the hefty one-time cost, the total expense of treating hepatitis C is greatly reduced compared with the life-long tab.

An estimated 3.2 million people in the US and 150 million around the world suffer from hepatitis C. Currently, some 400,000 patients are treated for hepatitis C in the US. Gilead says 30,000 patients were treated with Sovaldi during the first quarter.

There are risks. Other pharmaceutical companies currently are expected to gain regulatory approval for hepatitis C treatments over the next two years. Nevertheless, Gilead has a big head start. And the stock is cheap.

Wall Street currently projects earnings per share of $6.20 per share for 2014 and $7.70 in 2015. So, the stock currently trades at less than 14 times expected 2014 profits. We think the profit potential outweighs the risks.

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