Gilead Sciences (GILD 0.70%) is trading near all-time highs, but there's still potential for the stock price to go even higher. Here are three things that could send shares higher if they come to fruition.
Source: Gilead.
1. Sales of Gilead's hepatitis C drugs don't drop
Talk about a low bar for success. All Gilead really has to do is keep sales from dropping, and investors will be happy.
In the second quarter, Gilead made $2.36 per share on a non-GAAP basis thanks to $3.5 billion in sales of its hepatitis C drug Sovaldi. At that run rate, Gilead is trading at a P/E below 10, and that's with its all-oral cocktail expected to be approved before year's end.
Investors are clearly worried about the long-term stability of its hepatitis C sales. There's expected competition from AbbVie's (ABBV 1.27%) all-oral cocktail and others that are further back, and worries over the high prices of the drug. The big "problem" is that the hepatitis C drugs are a cure, so patients only need to take the drug for one course of treatment, unlike its HIV franchise where patients remain on HIV drugs forever.
There are certainly a lot of hepatitis C patients out there, and likely more who don't even know they're infected. Without a doubt, drugmakers will eventually run out of patients; but as long as it doesn't happen relatively quickly and Gilead is able to hold onto a substantial market share, investors should be happy.
2. A strategic acquisition
Sovaldi is a cash cow for Gilead Sciences. In the second quarter alone, Gilead generated $4.2 billion in cash flow from operations. The biotech has used some of the cash to repurchase shares, but that strategy has limited upside; decreasing share count increases EPS, but doesn't offer the growth potential that would come from launching another blockbuster.
Investors should have a lot of confidence in management's strategy after the acquisition of Pharmasset, which brought Sovaldi to Gilead. The purchase clearly panned out despite the high price tag that many investors chided at the time. Shares are up about 400% since the deal was announced.
A purchase in the oncology sector could really enhance the prospects for the rest of Gilead's oncology pipeline. The biotech recently got its first oncology drug, Zydelig, approved, but most of the rest of the oncology pipeline is further behind. An acquisition of a couple more approved drugs -- or even late stage compounds -- might make it easier to sell Zydelig from an efficiency standpoint, as well as giving Gilead street cred among oncologists.
3. Gilead Science starts offering a dividend
I'm not sure offering a dividend is the best use of Gilead's cash, but starting a dividend would undoubtedly increase the shareholder base, which should increase the share price. For instance, fellow big-biotech Amgen (AMGN 0.32%) announced in 2011 that it was going to offer a dividend. Shares are up about 140% since then -- not even including the dividends -- handily beating the S&P500's rise of around 50%. An increasing dividend has undoubtedly helped.
Of the three potential events that could make the stock rise, offering a dividend is probably the least likely of the three to happen in the near future; but if the first two come to fruition, a dividend may not be too far behind. The uncertainty of hepatitis C drug sales is one of the main arguments against a dividend -- the company certainly doesn't want to start a dividend and then stop it down the road. But if robust sales continue, and Gilead continues to mature into what looks more like a pharmaceutical company than a high-growth biotech, offering a dividend would clearly be the next step.
