Gilead Sciences' (NASDAQ:GILD) sliding hepatitis C revenue has taken a toll on its share price since 2015 and new competition from AbbVie (NYSE:ABBV) poses an even bigger risk to its future hepatitis C revenue. Given that hepatitis C revenue has slipped from an annualized run rate of about $20 billion to $12 billion exiting the second quarter, it's little wonder Gilead Sciences has ended up in investors' discard pile. Nevertheless, there's a lot that could go right for Gilead Sciences from here and a bargain-basement valuation has me thinking that now is a good time to buy shares in this beaten-up biotech.

No. 1: A big splash

Make no mistake, Gilead Sciences' decision to leapfrog to the forefront of oncology research with its acquisition of Kite Pharma is a big reason why I think this company's stock should be in your portfolio.

Clothing tags with letters on them that spell the word "SALE."


Buying Kite Pharma landed Gilead Sciences' chimeric antigen T-cell receptor (CAR-T) therapies that amp up a patient's ability to seek out and destroy cancer cells. This approach involves removing T-cells from a patient, shipping them to a lab for reengineering and then infusing them back into the patient. In clinical trials, the response rates to CAR-T were impressive in tough-to-treat non-Hodgkin lymphoma patients and that has me thinking the Food and Drug Administration will give Gilead Sciences' lead CAR-T, axi-cel, the green light when it issues a decision on Nov. 30.

If it gets an OK, Gilead Sciences has capacity in place to treat 4,000 patients in the first year of commercialization, and since axi-cel is likely to cost upwards of $300,000, it could quickly add $1 billion or more to Gilead Sciences' top-line results.

However, axi-cel isn't the only reason why investors should cheer Gilead Sciences' decision to buy Kite Pharma. The deal also netted Gilead Sciences additional CAR-T therapies that could allow its use in other cancer indications someday. For example, work is underway in multiple myeloma, and that alone is a multibillion-dollar treatment market. Additionally, the acquisition also landed Gilead Sciences a second promising platform for drug development called T-cell receptor (TCR) technology. Eventually, TCR could allow Gilead Sciences to treat patients with solid tumor cancers that aren't as easily tackled by CAR-T.

No. 2: Awesome operating margins

Declining hepatitis C drug sales have taken a toll on Gilead Sciences' share price, but its operating margin still remains best in class among its big-cap biotech peers. For instance, Gilead Sciences makes more profit per sales dollar than both Celgene and Amgen.

GILD Operating Margin (TTM) Chart

GILD Operating Margin (TTM). Data by YCharts.

In part, Gilead Sciences' top-tier margin is due to focusing on the development of drugs that can dominate standard of care. It's been on the cutting edge of HIV treatment for over a decade and ongoing investments in combination drugs that are safer and more effective and thus provide it with enviable market share and pricing power. In less than two years, combination HIV therapies that include TAF, a safer formulation of its top-selling Viread, are generating over $1 billion in sales per quarter and one of those drugs, Genvoya, is now the most prescribed drug in newly diagnosed HIV patients.

Similarly, while it faces increasingly more competition in hepatitis C, it pioneered the development of high cure rate treatments. The company's launched four hepatitis C drugs in the past four years, and although curing hepatitis C is shrinking the overall market, Gilead Sciences remains the market-share leader in the indication.

A big benefit from the company's business model is that it allows it to spend less on selling, general, and administrative costs (SG&A) and more on research and development (R&D) than its competitors. As a percentage of sales, Gilead Sciences spends far less than Celgene and Amgen, and despite spending $4 billion on R&D, its R&D expenses to revenue are also lower than its competitors.

GILD SG&A to Revenue (TTM) Chart

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

No. 3: Bargain-basement price tag

Gilead Sciences' reputation for drug discovery and development could mean that the hit to revenue caused by slowing hepatitis C sales will be temporary. If so, then buying shares when its price by its earnings (P/E) ratio is only about 9 could be savvy. Gilead Sciences isn't just cheap on a P/E basis, either. Divide its share price by the company's break-up value, and you get a price-to-book ratio that's below 5. Divide its share price by its sales over the past 12 months and you get a price-to-sales ratio of less than 4. In all three cases, these valuation measures are at or near 10-year lows.

GILD PE Ratio (TTM) Chart

GILD P/E Ratio (TTM). Data by YCharts.

Investor takeaway

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, its earnings could climb faster than people think, and if that's true, then easier year-over-year comparisons because of the current weakness could help this company's shares get back to their winning ways.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.