Major stock market indexes keep hitting record highs, but shares of Gilead Sciences, Inc. (NASDAQ:GILD) have been moving in the opposite direction. Although profits have fallen in recent quarters, this biotech still generates bucketloads of cash, and the recent acquisition of a breakthrough cancer therapy could turn the tide. 

The average stock in the benchmark S&P 500 index trades at a price around 25 times the amount of profit earned over the past year. That makes Gilead Sciences' single-digit earnings multiple seem downright irresistible to bargain shoppers.

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Successful value investors know that most of what glitters also underperforms. So before we get too excited about the new drugs that give this stock market-beating potential, let's take a cold-hearted look at why it's so cheap to begin with.

What's the problem?

Millions of people are infected with hepatitis C virus (HCV), but most don't know it or don't present symptoms severe enough to seek out this company's market-leading treatments. Gilead's HCV drugs, and those of its competitors, generally eradicate all traces of the disease in a matter of weeks.

Outstanding efficacy makes Gilead's HCV drugs great for patients, but a nightmare for analysts tasked with forecasting their trajectory. Third-quarter sales of Gilead's HCV drugs have declined from a peak of $4.8 billion in 2015 to just $2.2 billion this year.

Paths forward

While it's tempting to assume Gilead's HCV franchise sales are near a bottom, I think investors could still come out ahead even if the numbers continue sliding. As a proportion of total revenue, HCV has fallen from 58% in the third quarter of 2015 to just 34% during the three months ended this September.

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Unlike hepatitis C, HIV remains a chronic infection that requires a lifetime of treatment. This is why a new antiviral candidate that looks highly effective and easy to tolerate could drive growth for the company in the years ahead.

The Food and Drug Administration is expected to deliver an approval decision on or before Feb. 12 for Gilead's combination of bictegravir, emtricitabine, and tenofovir alafenamide for chronic treatment of HIV patients. If the combo is approved, as is widely expected, EvaluatePharma thinks sales of the drug could reach $4.4 billion in 2022.

While Gilead's new HIV combo winds its way toward pharmacy shelves, a next-generation cell-based cancer therapy is already bringing fresh hope to some cancer patients who had run into brick walls treatment-wise.

Non-Hodgkin lymphoma patients who relapse or just don't respond to existing treatments are so difficult to treat that oncologists used to get excited when new drug candidates made tiny dents in disease activity. With this in mind, imagine how thrilled they'll be to learn that 15 months after receiving a single infusion of Gilead's Yescarta, 40% of these advanced-stage lymphoma patients were still in complete remission. Although the initial launch has been slow, stellar data is expected to raise annual Yescarta sales to a peak of around $2.6 billion.

While new HIV and oncology drugs should offset HCV losses in the quarters ahead, Gilead Sciences will also advance one of the most promising programs aimed at nonalcoholic steatohepatitis. NASH is a life-threatening liver condition associated with excess fat storage, and one of Gilead's candidates just showed it significantly reduces patients' liver fat content in what may have been one of the most underappreciated readouts of the year.

Gilead has long assumed that a highly effective NASH therapy will have to do more than simply lower liver fat content, which is why it's exploring a combined approach that will test its shareholders' patience. With spending on medicines to treat NASH expected to reach $40 billion by 2025, though, it's well worth the wait.

In the numbers

With Yescarta already approved, and another potential blockbuster HIV therapy largely expected to get a green light, Gilead Sciences CEO John Milligan thinks the company's bottom line could stabilize and perhaps begin rising in 2018. If that's the case, this stock at recent prices has "deep value" written all over it.

Free cash flow is calculated as all the cash generated by a company's operations, minus capital invested to keep those operations humming along. You can also think of free cash flow as profits that a company can return to shareholders in the form of dividends and share buybacks, or use to make acquisitions.

Over the past year, Gilead's operations generated a whopping $11.8 billion in free cash flow, or about $8.91 per share. That's not too bad for a stock that's been trading at about $74 lately. If profits begin rising again in 2018, as Milligan suggested, returns could get even better.

Cory Renauer owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.