By: Adam Feuerstein | 02/05/14 - 10:54 AM EST
(GILD) is down 5% to $77.70 Wednesday following what seemed like
strong fourth-quarter earnings and an optimistic outlook for 2014 (despite excluding hepatitis C drug sales from revenue guidance.)
So, why the hell is the stock so weak?
I have no definitive answer, of course. The broader market is selling off today and biotech stocks are particularly weak.
Favus Institutional Research, Elliot Favus' proprietary research shop, issued a short report on Gilead today, offering seven reasons to sell the stock -- none of which are really new. To summarize, Favus says Gilead is heading lower because 1) there is little margin of error for the Hep C drug launch with expectations already sky high; 2) Gilead's shareholder base has become too generalized and they don't understand Hep C; 3) Gilead admission that it will run DTC ads for Hep C is a negative; 4) Hep C is not like HIV because patients are cured; 5) Abbvie (ABBV) is competitive; 6) Lots of Hep C patients are veterans and/or prisoners, making access and pricing challenging; 7) the retirement of Gilead's commercial operations chief Kevin Young is weird.
Has anyone not heard these arguments before? Doesn't necessarily mean some/all are not true, but it's not like Favus has uncovered the big smoking gun that will take down Gilead, either.
Anyone else want to take a shot at explaining Gilead's weakness? Mark Schoenebaum of ISI Group, I see your hand raised. Take a stab:
1) Gilead's decision not to give Hep C product sales guidance last night is worrying investors, even though the company is known to be conservative. 2) The [favorable] tax comments on the conference call were confusing. 3) Operating expense guidance for 2014 was higher than anticipated. 4) Gilead has changed its tune about who is taking Sovaldi. It's now more genotype 1s than genotype 2s, which could suggest an increased risk of a sales slowdown later this year before the Sovaldi/ledispavir launch.
And what does this all mean, Mr. Schoenebaum?
The critical point with stock is, in my opinion, that GILD is virtually assured of earning at least $8, and probably closer to $10 by 2016. Thus, at around $80, the implied PE on that number is not high and downside seems pretty limited. And, if they crush Street numbers and investors can get incremental comfort that there is "tail value" here (this is the BIGGEST INVESTOR DEBATE RIGHT NOW!!), a PE of around 12x 2016 (i.e. $95-$100) seems doable when we are standing in January of 2015.
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