Summary
- Whether you’re a value or a growth investor, GILD belongs in your portfolio.
- Gilead Sciences is at the forefront of worldwide HCV eradication with its combination tablet: Harvoni.
- Regardless of anticipated competition, Gilead is a rapidly growing, highly profitable and cash-gushing machine.
- GILD is one of my top picks to significantly outperform the S&P 500 in 2015.
Investing in biotech stocks is not for the faint of heart… everyone knows this. But as both a physician and a hedge fund manager, I want to show you why investing in Gilead Sciences (NASDAQ:GILD) at today’s prices will be a great gift for investors in 2015.
It’s no secret that Gilead is at the forefront of the worldwide treatment and eradication of Hepatitis C virus (HCV). Briefly, HCV is a nasty little virus that primarily causes a chronic infection of the liver. While the infection itself may be asymptomatic, long-standing complications include cirrhosis, liver failure, varices of the stomach and esophagus (which may bleed), recurrent ascites (fluid in the abdomen), and death. It is the leading indication for getting a liver transplant–a major surgery.
Worldwide, it is estimated that up to 200 million people are infected with HCV. For more on HCV, check out this Wikipedia link.
Personally, as a practicing Interventional Radiologist, I treat the complications of HCV-infected patients on a weekly basis. These are sick people, and they know it.
Up until recently, there has been no good cure for HCV. But Gilead’s Sovaldi (sofosbuvir) changed everything.
Initially, Sovaldi was administered in combination with interferon, an immune system modulator, to improve efficacy. However, interferon resulted in an extreme love/hate relationship with its patients, as it caused significant side effects, including: flu-like symptoms, diarrhea, depression and weight loss.
The Perfect Pill?
But on October 10, 2014, the FDA approved Harvoni for treatment of HCV-infected patients. Produced by Gilead, Harvoni is one tablet comprised of ledipasvir 90mg and sofosbuvir 400mg. It became the first combination pill to treat HCV genotype 1 infection and the first approved regimen that did not require the co-administration of ribavirin or interferon.
With efficacy ranging from 94-99% (depending on the genotype, presence of cirrhosis, and +/- previous treatment) and with only minimal side effects of fatigue and headache, Harvoni is at the leading edge of worldwide HCV treatment and eradication. It is easy to take, highly effective and (of course) quite expensive. It is a true game-changer.
The impact of this should not be underestimated.
Old News
None of what I just explained is new news to any healthcare providers or investors in the biotech space. Nor is the fact that there will be increasing competition from other pharmaceutical companies for the huge and lucrative HCV treatment population. At the moment, AbbVie (NYSE:ABBV) looks to be first runner-up with its Viekirax/Exviera combination therapy. Nor is the fact that Gilead Sciences is much more than just “that Harvoni company.”
What matters to investors is what the financial statements proclaim…
Value Versus Growth? How About Both?
With a current GILD stock price of approximately $101, Gilead offers investors a gift for 2015 that is almost too good to be true.
Perusing the freely-available Yahoo! Finance Key Statistics page for GILD, we note:
Trailing P/E: 18
Forward P/E: 10
Profit Margin: 45%
Operating Margin : 58%
Return on Assets : 29%
Return on Equity : 75%
Operating Cash Flow : 10.52B
These are just a few statistics that reveal the incredible value that GILD offers at current prices. It is a highly profitable, cash-gushing machine trading at an exceptional value.
But maybe you’re more of a growth investor. Is Gilead more than just a value play? Let’s look further:
Revenue : 20.7B
Quarterly Revenue Growth (yoy): 117%
EBITDA : 12.98B
Quarterly Earnings Growth (yoy): 246%
PEG Ratio (5-year expected): 0.51
These numbers are nothing short of astounding. Better yet, a recent Investor’s Business Daily article reveals a current Thomson Reuters analyst poll consensus of a 311% quarterly EPS increase for Gilead, to $2.26 per share. I don’t care who you are or what you’re selling, this is incredible growth for a company with a market cap of $152 billion.
Too Good To Be True?
Over the past 52-weeks, GILD has returned 36.5% vs. a 9.0% return for the S&P 500. Therefore, an argument can be made that much of the aforementioned bullishness has already been priced into the stock.
To that end, high expectations frequently cause sharp drops in stock prices if quarterly earnings expectations are not met. This clearly occurred following Gilead’s recent Q3 earnings miss ($1.84/share actual vs. $1.92 estimated), when GILD closed at $114.22 on October 30, 2014, and subsequently dropped 12-14% to as low as $100.44 on its November 17, 2014 closing.
The stock has languished in the $100-110 range since the beginning of November–hardly a noteworthy performance.
Further, if the upcoming Q4 earnings disappoint the lofty analysis consensus of a 311% increase, which is quite feasible, the stock may face yet another post-earnings announcement decline.
However, I strongly believe that this would be a prime example of missing the proverbial forest for the trees. As long as Gilead’s price remains at or near current levels, rapidly increasing earnings will only further reduce the P/E ratio.
This is my favorite set-up as an investor, which I liken to a compressed spring. As earnings increase, the “compression force” of a depressed stock price rises proportionally. Eventually, the earnings growth overpowers the relatively low price, and the stock rapidly springs higher as the market realizes the discrepancy. Sidelined investors pile in, shorts are covered, and in the end, no one can believe the stock was selling for so cheap only a few days ago.
This event usually occurs during an earnings announcement that surprises investors to the upside and I fully expect this scenario to play out with Gilead in the first or second quarter of 2015.
Recommendation
Barring an unanticipated act of God or, worse, Congress, Gilead might possibly be the best value and growth play on the market today. The story is intriguing and the numbers don’t lie.
Like Harvoni, Gilead’s nearly-miraculous combination pill, investing in GILD today will work wonders for the health of your investment portfolio in 2015 and beyond.
Additional disclosure: Jeff Ross, MD, is also the CEO and managing director of Vailshire Partners, LP, a multistrategy hedge fund. Vailshire Partners is long GILD. For more information, please see vailshire.com
This article originally published by Seeking Alpha