Despite a staggering year-on-year growth of over 120% in revenue, the stock price of Gilead Sciences Inc. (GILD, Financial) has fallen by close to 10% from its high water mark six months ago. And this is despite the stock having a fairly low trailing P/E ratio of 13.66 that is significantly lower than many of its biotech competitors and a free cash flow of over $12 billion. But then why is the market discounting all the good numbers? Let’s take a dig at it.
Rivals in the hepatitis C drug market
In December 2013, Gilead launched Sovaldi, a medicine to treat hepatitis C, and its sales boosted revenues for the calendar year 2014 which were around $10.3 billion. In October 2014, the company launched another drug, Harvoni, that treats a common variant of hepatitis C and even this racked up sales of over $2 billion in the following quarter alone.
Rival AbbVie (ABBV, Financial) has already rolled out its own hepatitis C drug, Viekira Pak and has also entered in to a deal with Express Scripts (ESRX, Financial). Reportedly, this has prompted Gilead to discount its drugs by over 45% to maintain exclusivity with the rival pharmacy giant. Both the discount on Gilead’s drugs and the entry of a rival drug seems to have provided a sense of perspective to the market, insofar as there is no certainty of Gilead having another stellar year of growth driven by its hepatitis C drugs.
Duration of treatment
Like AbbVie, other pharma companies such as Achillion Pharmaceuticals (ACHN, Financial) and Merck (MRK, Financial) are also working on developing new drugs to treat hepatitis C. Right now, Gilead has the advantage in large part due to the shorter duration of its treatment compared to everything that came before. But there is no saying that any of the new medicines under development will not better that and therefore potentially unsettle Gilead or at least dent a huge chunk of its current market share. The increased competition for market share will surely lead to some sort of a price war though, and that is bound to affect margins.
Patent trouble
Earlier this year, Gilead’s patent application for Sovaldi in India was rejected by the patent office there. The company has filed a petition in the Delhi High Court which has ordered a rehearing. In the meanwhile, Indian pharmaceutical firm Stride Arcolab has released a generic version of another Gilead hepatitis C drug, Sofosbuvir, last week. According to estimates, 12 million to 18 million people infected with hepatitis C live in India, compared to about 3 million in the U.S. Losing out on this lucrative market could be bad news for the future growth of Gilead if the patent case in India goes against it. Further, if the company face such potential adverse patent decisions in other markets, too, that will prove to be quite troublesome and might have a detrimental effect on the pharma major’s business numbers.
Conclusion
The company will certainly continue to grow but not at the same blistering pace as it did in the year gone by, and that is usually a let-down for many investors. However, that should only cause a short term blip in the stock price. Gilead’s own fundamentals seem pretty solid, and there seems to be little of concern in its own performance. However, all the external factors affecting the company, such as the performance of its rivals and the issue of patents in other big markets, are the important ones to watch. We recommend a BUY on the stock, but investors should keep an eye out for these external factors too.
