The stock has skyrocketed 345% since March 2011, as the company, which discovers, develops and commercializes new medicines, benefited from low-cost manufacturing and a small sales force. However, the stock has slipped almost 11% over the past year, primarily on concerns about its HCV drug sales and market share, and it has come under additional pressure on discouraging news about a cancer drug.
Is the bull case for Gilead finally over, or is this actually an attractive opportunity to cheaply enter a biotech growth winner?
Gilead is trading at its 52-week lows of about $89 a share. However, considering the stock's spike over the past five years, the pharma player looks like a bargain biotech stock.
By comparison, peers Abbott gained 73.5% and Pfizer rose 46.4%. Meanwhile, Amgen's 170.5%, though impressive, hasn't come close to Gilead's five-year increase.
The recent price correction means that Gilead at 5.6 times enterprise/earnings before interest, taxes, depreciation and amortization is cheaper than its peers Amgen at 10.18, Celgene at 28.17 and Regeneron Pharmaceuticals at 9.3.
With the drop in share price, at 7.2 times forward earnings, Gilead is available at a steep discount to its five-year average of 21 times. In addition, it is also cheaper than all its peers such as Amgen at 11.85 times, Biogen at 12.44 times, Celgene at 13.55 times and Regeneron Pharmaceuticals at 22.28 times.
Gilead has evidently created biotech-driven wealth for shareholders, and with its strong pipeline of HCV and HIV drugs, is well on its way to generating higher returns.
That said, Gilead faces headwinds that can't be ignored. A top scientist who was leading clinical development of Gilead's cancer drug pipeline left the company in February.
What's more, in what Gilead said is an unrelated development, the company this week halted six clinical trials involving its once-promising blood cancer drug Zydelig, after regulators found that it caused adverse side effects.
Regardless of these setbacks, the company has slowly built an impressive pipeline of drugs at various stages that span across liver, cancer, HIV/AIDS, cardiovascular and inflammatory treatments. It has thus shrugged off its image of being a factory that spins out only mega-blockbuster hepatitis C drugs Harvoni and Sovaldi.
Although competition from AbbVie's Viekira Pak and Merck's Zepatier does exist, Gilead offers plenty of other growth opportunities in the biotech sector.
Wall Street has yet to price in Gilead's full value portfolio of key drugs.
The company's Odefsey medicine, recently approved by the Food and Drug Administration for the treatment of HIV-1 infection in certain patients, is a very attractive opportunity for growth. The company has been transitioning its HIV product line to TAF (tenofovir alafenamide) because it is as effective at a lower dosage and also easier on the bones and kidneys of affected patients.
Meanwhile, Wall Street's apprehensions about Regulus Therapeutics' RGLS RG-101 drug candidate being more effective than Gilead's Harvoni are misplaced, as Regulus' drug is still in Phase 2 clinical trials.
Gilead has been generating huge amounts of cash as determined by its free cash flow of $19.5 billion. The chunk, though not in excess of its debt of $22 billion, will suffice to pay it down, owing to its nearly 55% trailing 12 months' profit margin and lean operations.
With its free cash flow just under the combined figure of Amgen and Pfizer of $21.48 billion, the company is among the biggest generators of cash among biotech and even non-biotech plays.
One concern that investors might face is Gilead's continuing legal dispute with Merck over royalties of the very successful hepatitis C medicine, sofosbuvir, which include Harvoni and Sovaldi. Although a federal judge recently decided that the drugs had infringed on Merck's patents, the battle is still under way.
Even if Gilead does have to pay Merck any of its sales proceeds, which may amount to more than $3 billion, with nearly $15 billion in pure cash and substantial investments, Gilead is well positioned to pay up, if required.
Armed with its product portfolio and pipeline, Gilead has beaten estimates on earnings and revenue at least for the past four quarters. Analysts too are bullish on the stock and have set a 12-month median price target of $116, representing a 29.7% increase. There is therefore enough reason to think that Gilead's stock is poised to reverse its recent losses and deliver value.
Best biotechnology stock under $10: Here's a small-cap biotech "rocket stock" that is about to take off. UCLA researchers are stunned by a Nobel Prize-winning cancer breakthrough that is proven in clinical trials to eliminate lethal forms of cancer with a single dose. One small company owns the patent to this life-saving treatment. Now trading at about $5 a share, the stock of this innovative company is projected to surge 2,700% on an imminent Food and Drug Administration announcement. To download the full report, click here.