Gilead Sciences (GILD 0.28%) 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.
IMAGE SOURCE: GETTY IMAGES.
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) 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) 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 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.
