I realize that biotech stocks are not really value investments, per se. They constantly need R&D to keep up with competitors and the competitive advantages from drug patents have a limited, albeit long, time frame. However, with Gilead (GILD, Financial) there could be some reward owning at this level.
The Company’s areas of focus include human immunodeficiency virus (HIV), liver diseases such as chronic hepatitis B virus (HBV) infection and chronic hepatitis C virus (HCV) infection, oncology or inflammation and serious cardiovascular and respiratory conditions.
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This focus has paid off well. The company has an abnormally high return on equity (90%), stellar net profit margins (51%), and its R&D only makes up about 12% of gross profit.
By comparison, Merck (MRK, Financial) spent 30% of its gross on R&D, AbbVie (ABBV, Financial) spend 24%, and Pfizer (PFE, Financial) spent 22%. GILD has a big advantage and wide moat just based on this key aspect.
The company’s success is because of its small salesforce, manufacturing efficiencies, and a selective R&D process (hence the low spend rate). This had helped GILD bring to market two great new Hepatitis C drugs, Sovaldi, and Harvoni, which sold $10.3 billion and $2.1 billion in 2014. Together these products have generated revenue close to what is thought to be the world’s best-selling drug, Humira, made by AbbVie (ABBV, Financial). AbbVie (ABBV) trades at a 58 multiple. Gilead (GILD, Financial) trades at 12 times earnings.
To go along with a multi-billion dollar marketable drug franchise that will extend into the the late 2020’s, the company also has a serious drug pipeline.
Investors could easily see another significant jump in earnings over the next 3 to 5 years as Gilead looks to attack other massive markets.
Gilead’s management boosted guidance to $29 billion for 2015, which could mean profit climbs to $15 billion or higher. And, in an industry where the average price multiple is triple what Gilead garners currently, it’s only a matter of quarterly earnings announcements before this stock trades higher.
The stock has been choppy year to date, so even if you bought in now, it may trade back to $100 or below. This is one that you want to build a position in over time.
From a purely numbers standpoint, if the firm grows at 15% a year, which could be likely given the market for its drugs, in 5 years, you could see a $12 to $15 per share earnings number. At 15x that’s $180 on the low end and $225 on the high end.
I’m not the only one that thinks this. Leon Cooperman (Trades, Portfolio) just bought 612,500 shares of the stock and Joel Greenblatt (Trades, Portfolio) upped his stake 52% to 1,009,462 shares. Two other super investors are in GILD as well - John Rogers (Trades, Portfolio) with 802,803 shares and Julian Robertson (Trades, Portfolio) with 553,911 shares.
So, while biotech stocks may rely heavily on R&D, GILD has developed a durable advantage while minimizing that expense, drastically.
