It's been a less-than-stellar year for biotech blue chip Gilead Sciences (GILD -0.35%). The company's stock has been mired in a pretty steady downtrend since June 2015, and, over the trailing 12 months, it's off an unsightly 26%. Mind you, all the while we've witnessed the three major U.S. indexes go up to new all-time highs, making Gilead's underperformance that much more irritating to shareholders.
Gilead's HCV success played an integral role in its recent weakness
In many ways, Gilead's own past success can be blamed for its recent weakness. In late 2013, it brought Sovaldi to market as a next-generation oral treatment for hepatitis C. Less than a year later, Harvoni hit pharmacy shelves. The addition of these two hepatitis C virus (HCV) drugs was a breakthrough for Gilead and patients dealing with HCV. These were therapies that, in most instances, removed the need for treatment with ribavirin and definitely for IV interferon. Interferon and ribavirin treatments tended to cause unpleasant side effects, including anemia, rash, and flu-like symptoms for many weeks at a time. The newer drugs also completely cured patients over 90% of the time, which was a huge step up from prior generation drugs. In short, Sovaldi and Harvoni were a major step forward in patient quality of care.
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In 2015, Gilead realized this leap in patient care quality when it recognized more than $20 billion in HCV sales from its two therapies. However, after curing the so-called low-hanging fruit (i.e., the sickest patients) in the U.S., Gilead's patient pool has dwindled. For fiscal 2017, Gilead is forecasting just $7.5 billion to $9 billion in HCV sales. That's quite the two-year drop-off -- and the result has been a wild ride for investors.
Nonetheless, Gilead's roughly 44% tumble since hitting an all-time high in June 2015 could be an intriguing entry point for patient long-term investors. In fact, there are six very good reasons why Gilead just might be the most perfect stock you can consider adding to your portfolio right now.
1. Continued HCV dominance and overseas opportunity
Though it's often lately been cited as a detriment, I believe Gilead's dominant HCV market share and products can still drive the company's profits higher.
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It was expected that at some point Gilead's competitors would begin to take some of its ridiculously high HCV market share, and 2016 was that year. The entrance of Merck's Zepatier, which was priced around $40,000 cheaper than Harvoni on an annual wholesale basis, was one of the reasons Gilead was forced to be more competitive with its own pricing.
Still, there isn't a company out there that can outmatch Gilead's efficacy or treatment time frame when it comes to HCV -- and until there is, Gilead's HCV product portfolio should retain a significant chunk of market share.
It's also worth mentioning that the World Health Organization estimated that 180 million people worldwide have HCV. Gilead has treated just a fraction of those people, and most are in the U.S. Though the margins may be less lucrative in foreign markets, Gilead still has a long-tail opportunity to treat HCV globally.
2. HIV portfolio growth
Another factor that investors shouldn't overlook is Gilead's rapidly growing HIV drug portfolio. Unlike HCV, which now has an effective cure, there is no cure for HIV, albeit the treatment options are growing more effective, and the quality of care for the patient is improving.
Within the past year, Gilead introduced two new tenofovir alafenamide (TAF)-based medicines that could form the foundation of its HIV antiviral treatments for years to come: Odefsey and Descovy. These medicines, along with Stribild, Genvoya, Atripla, Truvada, Complera, and even the mature Viread, give Gilead a way to fight HIV at home and abroad. HIV could actually be the company's greatest growth driver over the next couple of years.
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3. Cash flow-based flexibility
Though it may be overlooked by investors, Gilead Science is generating a lot of cash from its operations. Sporting a non-GAAP operating margin of 65.9% in 2016, Gilead was able to generate $17.6 billion in income from operations and $15.9 billion in free cash flow. Even with more subdued net income and sales expectations for 2017, Gilead is very capable of achieving $10 billion or more in annual free cash flow.
Because Gilead is such a cash cow, it has the flexibility to consider supplementing its antiviral-based portfolio with inorganic growth opportunities via acquisitions. Gilead's management has previously opined that it would like to have a presence in the growing oncology market, so that may be a path to new revenue. Additionally, Gilead may choose to focus on hepatitis B, which has an even larger patient pool than HCV, or perhaps nonalcoholic steatohepatitis (NASH). Whatever Gilead chooses to do, it has the cash flow to make inorganic deals happen.
4. Dividend growth
A separate positive to Gilead's incredible HCV- and HIV-based cash flow is that it allows the company to treat its shareholders really well with regard to dividends and share repurchases.
In 2014, Gilead completed a previously authorized $5 billion share repurchase program, and in February 2015, the company's board authorized the repurchase of another $15 billion worth of common stock through 2019. Share repurchases may not be the most effective use of cash, but they do lower the number of shares outstanding and can make a company look more attractive on a fundamental basis.
In terms of its dividend, Gilead initiated a quarterly payout of $0.43 per share in the spring of 2015. Since then, this payout has grown to $0.52 per quarter, which is currently good enough for an S&P 500-topping 3.1% yield.
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5. Low likelihood of drug price reform passing
Sometimes the biggest catalysts for a company aren't what's currently happening, but what's unlikely to happen. In Gilead's case, the company has been heavily scrutinized over its respective list prices for Sovaldi and Harvoni ($1,000 per pill and $1,125 per pill, based on wholesale cost, and before gross-to-net discounting). Lawmakers in Washington, and even President Trump, have, on occasion, intimated that a drug-price reform bill would soon be passed to control prescription drug prices in America, which is likely weighing Gilead's stock price down.
However, I believe that prescription drug price reform is pretty much a long shot at best. Republicans are in control of Congress at the moment, and they as a party tend to favor free-market economics. It's going to be exceptionally difficult and very complicated to get a workable drug-price reform bill through Congress. This would imply that Gilead's pricing power should remain mostly unaffected going forward.
6. Valuation
Last, but certainly not least, Gilead's valuation could make it a stock worth buying. Even with its reduced forecast, the company is valued at under nine times Wall Street's expected 2018 EPS and a little under five times its EBITDA (earnings before interest taxes, depreciation, and amortization). These are exceptionally inexpensive ratios that, along with a 3.1% dividend yield, could make Gilead the most perfect stock in the world.
