Gilead Sciences (GILD, Financial) has experienced significant declines in revenue and net income over the last few years; however, when judged over a five- and 10-year period, the company is rock solid. In fact, Steven Cohen (Trades, Portfolio)’s Point72 owns 3 million shares and Jim Simons (Trades, Portfolio)’ Renaissance Technologies has 5 million shares.
Last month, a policy paper came out of the White House titled “The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs.” While the short-term focus seemed to support increasing generic drug competition, helping Medicare drugs prices, improving price transparency and reducing out-of-pocket costs, none of the policies should impact the profits derived from branded pharmaceuticals like Gilead.
There are ongoing declines at its flagship hepatitis C virus (HCV) franchise. In 2017, six out of 10 antiviral drugs reported a decrease in sales at the company. This included core HCV medicine Harvoni, which saw its revenue drop 52% during the year. By comparison, Harvoni sales made up 33% of total antiviral revenue -- $27.74 billion -- during 2016. It’s not insignificant, and the declines will likely continue as more competitors enter the market.
Gilead's expertise in infectious diseases and single-pill formulations is one of its strongest intangible assets the company has, and it serves 80% of treated HIV patients in the U.S. Gilead is now building its pipeline outside of HIV and HCV, which will require more acquisitions. But while Gilead should also continue to dominate its core markets, generating strong returns for the next couple of decades, what investors want to see is growth. That means using the $24 billion in cash it has on the books to build more drug pipelines.
From a purely numbers standpoint, Gilead trading at 11 times forward earnings and only 8 times cash flow is ridiculous.
Last August Gilead acquired Kite Pharma for $11.9 billion. Its CAR T-Cell therapies are poised to provide “one shot cures” for diseases, a new exemplar that leaves Goldman Sachs asking if curing patients is a sustainable business model, while MIT predicts 20 oncology gene therapy products will be approved by 2022. The market wants curative products, especially as recurring health care costs rise significantly and if cell therapy could be the answer, Gilead will be in the driver's seat.
In the last five years alone, the company has earned more than $50 billion on $125 billion in sales. And, with gross margins above 80%, expect it to post earnings per share above $6 in the next two fiscal years. I’m confident it will utilize current acquisitions to further enhance its pipeline and look for new opportunities to acquire income producers. In the meantime, take the 3% dividend and bargain price.
Disclosure: I am not long/short any stock mentioned in this article, but may initiate a long in Gilead over the next 72 hours.
