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Is Gilead Sciences, Inc. a Buy?

By Keith Speights - Dec 10, 2017 at 11:34AM

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The answer is a definite...

With only a few weeks remaining in 2017, Gilead Sciences (GILD 0.30%) stock price appears to be on course to finish roughly at the same level that it began the year. After getting off to a rocky start, the biotech's share price gained significant momentum beginning in June thanks to better-than-expected second-quarter results and an acquisition of Kite Pharma. However, the euphoria faded in the fourth quarter.

Is Gilead Sciences a smart pick for investors now? The best way to answer the question is to evaluate the reasons for investing in the biotech and weigh them against the reasons not to buy it. 

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Why buy Gilead?

One important reason to buy Gilead stock right now is its valuation. The biotech's shares currently trade at less than 11 times expected earnings. That level is well below Gilead's peers.

Income investors should like Gilead's dividend. Its yield stands at 2.84%. Since initiating the dividend program in 2015, Gilead has increased its dividend twice by 10% or more. The company appears to be in excellent shape for further dividend increases, with an ultra-low payout ratio of 23%.

After suffering steep revenue and earnings declines over the past couple of years due to deteriorating dynamics for the hepatitis C virus (HCV) franchise, Gilead CEO John Milligan said last month that he expects 2018 will be "the beginning of a growth phase" for the company. Milligan's optimism stemmed primarily from two factors: stabilization for Gilead's HCV franchise and solid growth for its HIV drugs.

A stop to the bleeding in HCV would be huge for Gilead. It's shaping up to be pretty much a one-on-one battle between Gilead and AbbVie in the market. The two companies aren't far apart on net prices (which reflect rebates and discounts from the list prices). Gilead thinks that the overall profile of its drugs should allow it to fare well against its rival.

As for HIV, Milligan's confidence is based on Gilead's current market dominance and the prospects for a promising new drug. Gilead expects to receive U.S. regulatory approval for its bictegravir/F/TAF combo by Feb. 12, 2018. Milligan thinks the combination therapy will become the most important drug for treating HIV. He's not alone. Credit Suisse analyst Alethia Young wrote recently that the bictegravir combo could be "the greatest of all time."  

Then there's the pipeline opportunities outside of HIV. Gilead claims a solid lineup of experimental drugs targeting treatment of non-alcoholic steatohepatitis (NASH). ASK-1 inhibitor selonsertib is in a late-stage clinical study, while FXR agonist GS-9674 and ACC inhibitor GS-0976 are in phase 2 studies. Gilead thinks that the potential for combinations of these and perhaps other drugs in fighting NASH is significant. If it's successful, the biotech could have yet another multibillion-dollar franchise on its hands. 

Gilead also has a promising autoimmune disease candidate in filgotinib. The JAK1 inhibitor is being evaluated in late-stage studies for treating Crohn's disease, rheumatoid arthritis, and ulcerative colititis. 

The Kite acquisition immediately made Gilead one of the top leaders in use of cell therapy in treating cancer. Gilead recently won Food and Drug Administration approval for lead drug Yescarta in treating certain types of large B-cell lymphoma. The biotech also has several phase 2 studies underway for the CAR-T drug in treating other types of cancer. 

Last but not least is Gilead's enormous cash stockpile. As of Sept. 30, 2017, Gilead had $41.4 billion of cash, cash equivalents, and marketable securities. With U.S. corporate tax reform more likely than ever, there seems to be a high probability, if not certainty, that the company will put a lot of this cash to use in funding additional acquisitions and licensing deals to beef up its pipeline.

Why not buy Gilead?

I think there are basically two major reasons why not to buy Gilead. The first is risk.

Pretty much all of the pluses for buying the biotech stock mentioned above come with risks. John Milligan might be wrong about Gilead's HCV sales stabilizing. Maybe the bictegravir/F/TAF combo won't be the huge hit that many expect. Gilead experienced its fair share of pipeline setbacks in the past. There's a real possibility more could follow with its NASH drugs, filgotinib, or Yescarta.

Gilead does have plenty of money to use for more acquisitions, but buying other companies doesn't always turn out to be as successful as hoped. Several of Gilead's acquisitions in recent years haven't panned out. 

What's the second reason why not to buy Gilead? Opportunity cost. Several of the reasons to buy the stock will take time to play out. That's especially true for Gilead's pipeline candidates. We're looking at a few years before most of its experimental drugs could reach the market -- and that's only if the clinical studies are successful and they win regulatory approval. An argument could be made that other stocks should generate gains more quickly. 

Final analysis

So is Gilead Sciences a buy? I say "yes." 

Obviously, risks exist. However, that's true with any stock, especially any biotech stock. I suspect that John Milligan is right that next year will be a turning point for the company. I like Gilead's pipeline, and don't think its value is adequately factored into the stock price right now. And while Gilead's track record isn't perfect on acquisitions, my view is that the biotech has done a pretty good job overall, particularly on big deals.

I don't dispute that there is an opportunity cost associated with buying Gilead. Frankly, if I could only buy one stock right now, it would be another biotech. But most investors aren't limited to just buying one stock. On balance, Gilead Sciences appears to be a smart long-term pick. And it's the long term that investors should keep in mind.

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