Gilead Sciences (NASDAQ:GILD) is a biotech behemoth, but its shares have fallen on tough times because hepatitis C sales are slipping. While headwinds in hepatitis C remain, the company's recent push into cancer treatment, best-in-class operating metrics, and cheap valuation make it a stock worth owning.

No. 1: A big splash

Make no mistake -- Gilead Sciences' decision to leapfrog to the forefront of oncology research by acquiring Kite Pharma is a big reason why this company's stock should be in your portfolio.

A golden pill sits on top of a pile of gold coins.


Kite Pharma is revolutionizing cancer treatment by developing chimeric antigen T-cell receptor therapy (CAR-T) that amps up a patient's ability to seek out and destroy cancer cells. The novel approach involves removing T-cells from a patient, shipping them to a lab where they're reengineered, and then infusing them back into the patient. In trials, CAR-T has produced impressive response rates in tough-to-treat patients diagnosed with non-Hodgkin lymphoma.

The Food and Drug Administration (FDA) is supposed to make an approval decision on Kite Pharma's lead CAR-T, axi-cel, on November 30. If it gets an OK, Gilead Sciences already has capacity in place to treat 4,000 patients in year one. Since axi-cel is forecast to cost upwards of $300,000, an approval could quickly add $1 billion or more to Gilead Sciences' top-line results.

However, axi-cel isn't the only reason why investors should be cheering Gilead Sciences' acquisition of Kite Pharma. Kite Pharma is researching CAR-T for use in other cancer indications that could significantly increase its addressable market. For example, it's researching its use in multiple myeloma, and that alone is a multibillion dollar market. Kite Pharma is also working on T-cell receptor technology, a different approach than CAR-T that may allow Gilead Sciences to market therapies for solid tumor cancers someday, too.

No. 2: Awesome operating margin

Declining sales for Gilead Sciences' hepatitis C drugs has taken a toll on its share price, yet operating margin at the company remains best in class. For example, Gilead Sciences makes more profit per dollar of sales than big-cap biotech peers Celgene and Amgen.

GILD Operating Margin (TTM) Chart

GILD Operating Margin (TTM) data by YCharts.

Gilead Sciences' top-notch profitability is due, in part, to developing and marketing drugs that have become standard of care. For instance, Gilead Sciences' ongoing innovation in HIV treatment has kept it a market-share leader in that indication. In less than two years, new combination HIV therapies that include TAF, a safer formulation of its top-selling Viread, are already generating over $1 billion in sales per quarter. One of those drugs, Genvoya, has become the most prescribed drug in newly diagnosed HIV patients.

Similarly, new drugs that functionally cure hepatitis C have made Gilead Sciences the dominant player in that indication, too. The company has launched four hepatitis C drugs in the past four years. While curing hepatitis C is shrinking the overall market for these drugs, Gilead Sciences remains the market-share leader.

This market dominance gives Gilead Sciences the ability to spend less on selling, general, and administrative costs (SG&A) and more on research and development (R&D) so that it can maintain its leadership. As a percentage of sales, Gilead Sciences spends much less than its peers on SG&A, and that translates into an important profit-friendly edge that should continue to support top-tier operating margins.

GILD SG&A to Revenue (TTM) Chart

GILD SG&A to Revenue (TTM) data by YCharts.

No. 3: Bargain-basement price

Gilead Sciences has a reputation for drug discovery and development, and picking up shares while they're on sale could be profit-friendly. Divide its price by its earnings over the past 12 months and you get a price to earnings (P/E) ratio that's below nine.

Divide its share price by the company's break-up value, and you get a price-to-book ratio below five. And divide its price by its sales over the past 12 months and you get a price-to-sales ratio of less than four. All three of these metrics are at, or near, 10-year lows.

GILD Price to Book Value Chart

GILD Price to Book Value data by YCharts.

What's next?

Gilead Sciences shares could go up, down, or sideways over the short term, but I think long-term investors ought to be using current prices as an opportunity to buy. The company's industry-leading operating metrics suggest that if it wins an FDA green light for axi-cel, earnings per share could climb faster than people think. If that's true, then picking up shares at discount prices could be smart.

Todd Campbell owns shares of Celgene and Gilead Sciences. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. The Motley Fool has a disclosure policy.