Gilead Sciences GILD has been up and down a lot over the last five years. A big reason is the company's Hepatitis C drug, which had a blockbuster year in sales during 2015, only to suffer price pressure ever since. Now, that business segment is in full-blown decline with sales coming in at $1.0 billion during the company's second quarter of 2018, off from the $2.9 billion result just a year ago.
Competition from other drug makers, lower prices forbed by insurance firms and a better cure rate are reasons for the precipitous decline. In terms of the marketplace, these could be seen as great news, but for Gilead, it has to be "on to the next one."
Meanwhile, its KITE acquisition has not been met with the best of receptions. Last fall, Gilead spent $11.9 billion to purchase a new type of immunotherapy for cancer called chimeric antigen receptor T-cell (CAR-T). According to the National Cancer Institute, CAR T-cell therapy is a treatment in which a patient's T cells (immune system cells) are taken from the patient's blood and changed in the laboratory so they will attack cancer cells.
KITE must have been making massive progress to warrant that kind of investment from Gilead, but the benefits are still years away. And, now that other big-name pharmaceutical makers like Biogen, GlaxoSmithKline and Novartis are jumping into the space, the race is on for patients.
The saving grace for Gilead has come from its remarkable HIV pill Biktarvy, which received FDA approval in February and has been well received worldwide. HIV drug sales during the second quarter were up 12% to $3.7 billion -- a number that will likely continue to grow as Biktarvy, Viread and Truvada are the heart of Gilead's $15 billion HIV business.
While Gilead has some products in its pipeline with high profit potential based on favorable test results, the profit from these drugs is years away with no predictability as to the strength of longevity of those income streams.
The drug Filgotinib, a new rheumatoid arthritis drug developed with Galapagos (GLPG), and Selonsertib, a medicine used to treat nonalcoholic steatohepatitis (NASH), will be welcomed by the marketplace when they are available. In the meantime, investors have a company with $27 billion in cash to build its next multi-billion dollar business by 2021 when the HIV franchise is expected to start declining.
Gilead is more efficient than most in the industry squeezing out higher gross profits and net income on lower capital spending. And, with a market value that is four times its current sales in an industry where the average is six times sales, the stock will remain propped up.
All told, it's highly unlikely that Gilead's stock will break out in either direction, which means that for investors who believe in its ability to produce or acquire another blockbuster drug, the runway for building a significant position in the stock is fairly long.
With that said, biotechnology companies are historically hard to value, as they rely on the next big drug or therapy to catapult them to higher levels of market capitalization. That's a big problem for value investors and one reason why no disciple of Warren Buffett (Trades, Portfolio) or Benjamin Graham should ever invest in a drug company, even Gilead, despite the number of super successful money managers like Steven Cohen (Trades, Portfolio), Jim Simons (Trades, Portfolio), and Stanley Druckenmiller (Trades, Portfolio) that have bought millions of shares.
Disclosure: I am not long/short any stock mentioned in this article.
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