Pat McKeough responds to many requests from members of his Inner Circle for advice on investing in stocks, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. Beginning this week, we give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of our new approach offering you regular and specific buy, hold and sell advice in our daily posts. Every week you’ll get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.
This week we got a question from an Inner Circle member who is interested in a stock but concerned that it doesn’t pay a dividend. Gilead Sciences is a drug company that specializes in combatting viruses. Hepatitis C is the primary target of treatments developed by Gilead Sciences, but it also plays an important role in treatments for HIV/AIDS. Pat assesses the status of the company’s leading drugs and examines the challenges the company faces maintaining a position of leadership in a highly competitive field.
Q: Please give your opinion on Gilead Sciences. It sounds very good to me as a physician, but it pays no dividend and I’ve bought into dividend investing. Thanks.
A: Gilead Sciences Inc. (symbol GILD on Nasdaq; www.gilead.com), discovers, develops and markets treatments for viruses.
The company has a number of drugs on the market, including AmBisome (an antifungal agent), Emtriva (for HIV), Tamiflu (influenza), Vistide (for cytomegalovirus retinitis—or an inflammation of the retina—in AIDS patients) and Hepsera (for hepatitis B).
Hepatitis refers to inflammation of the liver, as well as a group of viral infections that also affect the liver. The most common types are hepatitis A, hepatitis B and hepatitis C. Viral hepatitis is the leading cause of liver cancer and the most common reason why patients need liver transplants.
Gilead has developed a range of treatments to counteract hepatitis C, including its Sovaldi drug, which it started selling in December 2013. Sovaldi is more expensive than its main competitor, but it’s also more effective. This is one of the major reasons why Gilead shares have gained over 74% in the past year.
The market for hepatitis treatments is huge, with over 150 million people worldwide suffering from the condition. Hepatitis C is the most common strain and the one Gilead has the most expertise with.
The competition to develop an inexpensive hepatitis C treatment that’s easily administered (in pill form, for example) is intense. Besides Gilead, Abbott Labs, Vertex, Merck and Bristol-Myers have developed oral versions of a hepatitis C product. However, Gilead has about 75% of the worldwide hepatitis C market.
Cheaper Hepatitis C drug could undercut Gilead’s market share
In the three months ended June 30, 2014, Gilead’s revenue jumped 136.1%, to $6.5 billion from $2.8 billion a year earlier. That’s mainly due to Sovaldi, which contributed $3.5 billion to the latest total. Before one-time items, earnings climbed to $3.9 billion, or $2.36 a share, from $839.7 million, or $0.50.
The company spent $583.9 million (or 8.9% of its revenue) on research in the latest quarter, up 11.5% from $523.9 million (or 18.9%) a year earlier.
Gilead’s long-term debt of $7.9 billion is just 4.9% of its market cap. It also holds cash of $8.8 billion, or $5.77 a share.
Rival pharmaceutical firm AbbVie plans to launch a new hepatitis C drug by the end of 2014. This product will be much cheaper than Sovaldi, which costs $84,000 for a 12-week, one-pill-per-day treatment. That could significantly cut Sovaldi’s market share and weaken Gilead’s future earnings growth. Sovaldi’s high price also hurts Gilead’s ability to sell it in emerging markets, where most hepatitis-infected people live.
However, the company has a strong position in treatments for HIV/AIDS, including its Stribild drug combination, which it started selling in the U.S. in August 2012. European regulators approved Stribild in May 2013.
Like Sovaldi, Stribild is more expensive than other treatments but more effective. As well, Gilead holds the patents on all four drugs that comprise Stribild, so it doesn’t have to share the profits with other drug developers.
Gilead also has several other promising drugs in its pipeline. For example, it hopes to win regulatory approval to start selling Idelalisib, a new blood cancer therapy, this year. This drug, in combination with another, is safer for patients who aren’t fit for chemotherapy.
The stock trades at 17.1 times this year’s forecast earnings of $6.30 a share.
We view Gilead Sciences as a hold for aggressive investors.
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Pat McKeough responds to many requests from members of his Inner Circle for advice on investing in stocks, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. Beginning this week, we give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of our new approach offering you regular and specific buy, hold and sell advice in our daily posts. Every week you’ll get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.
