This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Breaking Up With Gilead Sciences

NEW YORK ( TheStreet) -- After more than a decade of being consistently bullish on Gilead Sciences (GILD) and watching the company's stellar management team build one of the most impressive and profitable businesses in healthcare, I'm stepping to the sidelines for now.

My decision isn't an easy one. Gilead has a great business model and earnings per share will grow substantially over the next few years, due to leverage from sales of Stribild in HIV and the inevitable initial sales bolus from sofosbuvir (GS-7977) and GS-5885, the company's lead hepatitis C drug candidates.

Here's the problem: Everyone knows Gilead is firing on all cylinders -- I wrote as much in late July -- and the company's massive $56 billion market capitalization already reflects significant future earnings growth. That will make relative outperformance in 2013 a difficult challenge.

Eventually, even perpetually bullish Wall Street analysts are going to realize the hepatitis C market is far smaller than current estimates suggest. Sanford Bernstein analyst Geoffrey Porges recently published a thoughtful analysis suggesting, based on two large managed care databases, that the U.S. hepatitis C market might be only a third as large as the most frequently cited estimates. Further, last month's lukewarm recommendation for screening Baby Boomers from the U.S. Preventative Services Task Force, which based its conclusion on the uncertain net benefit of widespread hepatitis C screening, supports my view that identifying patients will be a meaningful logistical obstacle.

Given these issues, it's hard to see how Gilead's $11 billion acquisition of Pharmasset will generate a positive return on invested capital. Even if sofosbuvir brings in $40 billion in cumulative sales, Gilead would only roughly break even on the deal. Not that most investors care about such metrics. Despite it's unarguably lofty price tag, the acquisition was clearly genius. (Few on Wall Street, myself included, thought so at first.)

In one move, management changed the conversation with investors from one focused almost exclusively on the still-distant HIV franchise generics " patent cliff" to one driven by excitement about a new hepatitis C franchise, which bulls perceive as one of the largest untapped potential markets in virology. As a result, Gilead shares are up an astonishing 81% year-to-date.

Gilead now trades at just under 17 times 2013 consensus estimates, a slight but reasonable premium to the expected earnings growth rate of 14%. The HIV franchise will continue to perform at or modestly above Street expectations. Sofosbuvir and GS-5885 seem poised to be the dominant treatment regimen for hepatitis C, even with strong competition from Abbott Labs (ABT) and others.

To be clear, I'm not suggesting the company's valuation is outrageous, more that it's hard to see the upside surprise from here. (For the record, I think Gilead's $510 million acquisition of YM BioSciences (YMI) last week was a good, but incremental, deal.)

When I change my investment view, I always try to practice good discipline and think about taking the other side of the trade. Yet without a clear-cut negative catalyst, I don't think Gilead is a compelling short right now. Nonetheless, the stock could modestly underperform as we move into 2013.

I may be leaving the Gilead party a bit too early, but that's okay with me. It's the holiday season, and there's always another one.

Sadeghi has no position in Gilead.

Nathan Sadeghi-Nejad has 15 years experience as a professional health-care investor, most recently as a sector head for Highside Capital. He has worked on the sell side (with independent research boutiques Sturza┬┐s Medical Research and Avalon Research) and the buyside (at Kilkenny Capital prior to Highside). Sadeghi-Nejad is a graduate of Columbia University and lives in New York. You can follow him on Twitter @natesadeghi.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,055.87 -116.81 -0.68%
S&P 500 1,982.77 -11.52 -0.58%
NASDAQ 4,508.6880 -19.0010 -0.42%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs