Horizon Therapeutics PLC (HZNP, Financial) and Gilead Sciences Inc (GILD, Financial) are two contrasting stocks from the drug manufacturing industry, in my opinion. What they share is a price that has pulled back recent highs, but that doesn't necessarily make both of them bargains.
Company basics
Horizon describes itself this way in its earnings report for the third quarter of 2020:
"Horizon today is a leading, high-growth biopharma company focused on rare diseases, delivering innovative therapies to patients and generating value for our shareholders. Our strategy is to expand our development-stage pipeline for sustainable growth and maximize the benefit and value of our key growth drivers TEPEZZA and KRYSTEXXA, both rare disease medicines."
Based in Dublin, Ireland, it began trading publicly in July 2011 and has a current market cap of $16.10 billion.
Gilead, which that has been in the news recently for its Remdesivir being approved as a Covid-19 therapy, is a drug manufacturer that specializes in antiviral drugs for conditions such as HIV, hepatitis B, hepatitis C and influenza.
The Foster City, California-based firm has a market cap of $75.70 billion.
Fundamentals
Starting with their financial strength ratings, we see Horizon has a modest lead with a rating of 7 out of 10 vs. Gilead's 5 out of 10.
A couple of factors stand out when comparing their financial strength tables: Horizon has less of a debt load and a bigger edge when comparing return on invested capital (ROIC) and weighted average cost of capital (WACC). Notably, Horizon has a ROIC of 39.46% versus a WACC of -1.13%. For Gilead, its ROIC of 5.19% barely beats its WACC of 3.57%.
Turning to profitability, Gilead comes out well ahead with a rating of 8 out of 10 compared with 3 out of 10 for Horizon.
Despite the low rating, Horizon posts some solid metrics:
Neither company has a history of consistent revenue and earnings growth; both have predictability scores of 1 out of 5 stars.
Valuations
The GuruFocus Value chart gives Gilead a ranking of modestly undervalued, while Horizon is listed as significantly overvalued. The latter is no surprise when we see its price chart:
Why this huge jump on Horizon's chart? It seems to be mainly because one of its signature drugs, TEPEZZA, which received FDA approval for the treatment of thyroid eye disease (TED) in January.
Gilead's value chart is less inspiring, but perhaps of more interest to value investors:
The price-earnings ratio for Gilead, on the other hand, points toward overvaluation; its current price-earnings ratio is 62.25 compared to its 10-year median of 14.65. It has no PEG ratio because its Ebitda growth rate is negative (along with its revenue growth rate).
Horizon's price-earnings ratio also appears to be at odds with its GuruFocus Value rating; it is currently 19.93 compared with its 10-year median of 51.55. There is no PEG ratio for it because its Ebitda growth rates are greater than its price-earnings ratio. Horizon has a 12-month Ebitda growth rate of 62.30% while its three-year growth rate is 42.90%.
Total returns
Often, we can add a trendline to a price chart and derive a reasonable expectation about future capital gains, but neither Gilead nor Horizon has a chart that will do that, because they have had one-time bumps that skew the growth rates:
Horizon, a fairly young company, does not pay a dividend, while Gilead offers a good dividend yield of 4.42% thanks in part to a declining share price:
Thus, trying to predict potential future returns based on past results is a fruitless endeavor, in my view.
Gurus
Horizon is owned by eight of the investing gurus followed by GuruFocus. Others have held positions, but overall, they have been selling more than they have been buying since the end of the first quarter (when TEPEZZA was approved):
The three biggest positions at the end of the third quarter were held by:
- Jim Simons (Trades, Portfolio) of Renaissance Technologies, who reduced his stake by 14.86% to end the quarter with 8,780,875 shares. That gives his firm a 3.98% stake in Horizon.
- John Paulson (Trades, Portfolio) of Paulson & Co reduced his position by 2.9% to finish with 6,691,439 shares.
- Andreas Halvorsen (Trades, Portfolio) of Viking Global Investors cut back by 20.23% and wound up the quarter with 1,173,744 shares.
Turning to Gilead, a big selloff ended in the second quarter:
Of the 16 gurus who held Gilead stock at the end of the third quarter, these were the biggest holders:
- Dodge & Cox added 0.12% to its position and on Sept. 30 had 12,607,853 shares, good for a 1.01% stake in Gilead.
- Jim Simons (Trades, Portfolio) reduced his share count by 14.04%, leaving him with 7,651,879 shares.
- Pioneer Investments (Trades, Portfolio) added 15.92% to finish the quarter with 4,299,151 shares.
Conclusion
These two different companies from the drug manufacturing industry offer different situations for investors to consider. I think value investors will probably pass on both of them, as both have debt loads and neither offers a compelling valuation.
Growth investors who believe that Horizon Therapeutics can keep growing may see the current pullback as an entry point for potential capital gains.
Income investors may see an opportunity in Gilead; at the current share price, it offers a dividend of more than 4%.
Disclosure: I do not own shares in any of the companies named in this article.
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