Probably every investor interested in biotech knows all of the challenges facing Gilead Sciences (GILD -0.95%). Its once high-flying stock has been beaten down over the last couple of years as sales plunged for its hepatitis C franchise.
However, over the last month, Gilead stock has begun a tentative but distinct rebound. Is now the time to buy Gilead Sciences stock? These three charts show why the answer is "yes."
1. Cash plus free cash flow
It's one thing to look at Gilead's impressive cash stockpile, but it's even better to look at the biotech's cash and its free cash flow. This shows just how solid of a position the company is in financially.
Even though Gilead's revenue and earnings have fallen, the company is in better place when it comes to its cash position than it's ever been. Gilead has also been able to improve its cash position while paying out an attractive dividend with a current yield of 2.94%.
That dividend is one reason investors might like Gilead Sciences. Another is that the biotech has announced its intention to use its cash to make one or more strategic acquisitions.
The last time Gilead spent billions of dollars to buy another company, it purchased Pharmasset. That $11 billion deal gave Gilead the drug Sovaldi, which led to Harvoni and to Epclusa. Over the past three years, those drugs combined to generate over $46 billion in revenue.
There's no guarantee that history will repeat itself, of course. However, Gilead has demonstrated a knack for making smart big deals -- and another one (or more) could be on the way.
Gilead Sciences' pipeline includes so many experimental drugs that instead of showing all of them, the chart below provides a summary by therapeutic category and phase. The picture tells an interesting story for the biotech.
For most of its history, Gilead was known primarily as an HIV drugmaker. The company's HIV franchise is still a huge moneymaker, but HIV is no longer where most of Gilead's research efforts are focused. That being said, the biotech's late-stage combination treatment of bictegravir/F/TAF should be a massive blockbuster if approved.
Note that Gilead's pipeline has the most development in the inflammation/respiratory category. The main candidate in this area is filgotinib. The JAK1 inhibitor is in three late-stage studies targeting rheumatoid arthritis, Crohn's disease, and ulcerative colitis. Gilead licensed the drug from Galapagos (GLPG -0.87%) in 2015 for an upfront payment of $725 million with potential milestone payments of up to $1.35 billion. Peak sales projections for filgotinib range from $2 billion to $6 billion.
Perhaps the greatest opportunity for Gilead, though, lies in treating non-alcoholic steatohepatitis (NASH), a liver disorder that some have pegged as the "next hepatitis C" because of its market potential. The biotech has one late-stage candidate for the indication (selonsertib) and two others in mid-stage studies.
Gilead Sciences stock appears to be dirt cheap. Here's how Gilead compares in valuation to several of its peers -- Amgen (AMGN -2.89%), Biogen (BIIB 2.02%), and Celgene (CELG).
Granted, these biotechs aren't in the same position from a business standpoint. For example, Celgene is expected to grow earnings by more than 20% annually for the next several years, so it appears to deserve a higher valuation. Biogen recently launched a new spinal muscular atrophy drug, Spinraza, that should be a big winner. Amgen, however, is experiencing price erosion for several of its top drugs and could need an acquisition like Gilead does.
The point here is simply to show how low Gilead's valuation is in light of the other points discussed earlier. For just over nine times expected earnings, investors can buy the stock of a company that has one of the best cash positions around. This same company boasts a pipeline with multiple candidates with mega-blockbuster potential. My take is that Gilead stock won't remain this inexpensive indefinitely.