Gilead: Dirt Cheap?

03/15/2017 7:00 am EST


Bob Ciura

Contributing Editor, Wyatt Investment Research

The past two years have been a nightmare for Gilead Sciences (GILD) and its shareholders; after reaching a high of $123 in June 2015, the stock has gradually declined ever since, observes Bob Ciura, contributing editor to Wyatt Research's Daily Profit.

Gilead shares recently dipped below $70 per share. The steady fall has been due to investor fears over the company’s core Hepatitis drugs facing increasing competition and regulatory pressure.

While Gilead’s sales and earnings have deteriorated, the company is still highly profitable. And, it has a huge amount of cash on the balance sheet that it can use to replenish its product pipeline. With a dirt-cheap valuation and a 3% dividend yield, Gilead stock may have finally hit bottom.

At the heart of Gilead’s woes is its flagship HCV portfolio, which includes its flagship Hepatitis C treatments Harvoni and Sovaldi. Led by these two medications, Gilead’s HCV products represent nearly half the company’s total revenue.

This is a big problem for Gilead. As a biotech company, it is vulnerable to competition. Its fate rests in the success of new drugs. Moreover, in an era of increasing political and public furor over drug prices, Gilead has been severely pressured.

Fortunately, Gilead is taking action. It has aggressively invested in research and development — including $5 billion of R&D last year—to develop new products in HCV, as well as emerging therapies like HIV and oncology.

The company also has a growing portfolio of therapies for HIV. Gilead also has a high-growth inflammation and respiratory portfolio. This is also helping protect against declines from its core HCV products.

Gilead’s valuation has compressed to a miniscule level, as the fear has escalated. Right now, shares trade for a dirt-cheap P/E ratio of 7.

As Gilead’s HCV business recovers and it sees growth in new therapies, investors could become more comfortable with the company’s growth trajectory.

Gilead remains a highly profitable company. Even last year, which was marred by severe price deflation, the company still earned $9.94 per share.

And, the company is in strong enough financial position that it could turn to a sizable acquisition, if it feels its internal R&D is not working quickly enough.

Gilead ended 2016 with $32 billion of cash, investments, and marketable securities on its balance sheet. Its cash hoard could be put to work to acquire a company in a targeted field, to boost its pipeline even further.
The falling share price over the past two years has presented a unique opportunity. Gilead shares now look very attractive for value and income investors, which is extremely rare for a biotech stock.

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