With the market shifting away from richly valued speculative growth stocks lately, it might be worth it for investors to consider investing in companies that are established leaders within their fields, particularly those that have lagged the market recently and have become cheap as a result.
At first glance, this description fits Gilead Sciences (GILD 1.51%), one of the largest biotechs in the world with a forward price-to-earnings (P/E) ratio of 10, compared to the industry's average of 11.
Of course, before making a final decision to invest in this drugmaker, it's essential to look a bit closer at its business. Let's dig in and decide whether Gilead Sciences is as attractive an investment as it seems.
The financial results
The ongoing coronavirus pandemic has positively affected Gilead Sciences' financial performance. The company is raking in billions in sales from its COVID-19 antiviral drug, Veklury. During the third quarter, sales of Veklury clocked in at $1.9 billion -- more than doubling compared to the year-ago period -- thereby contributing meaningfully to the biotech's overall financial results.
On the other hand, the rest of the biotech's lineup seems to have flopped during the quarter. Total sales excluding Veklury dropped by 3% year over year to $5.4 billion. Including the COVID-19 therapy, Gilead Sciences' revenue increased by 13% to $7.4 billion during the quarter.
One reason behind the company's poor performance outside of Veklury is that its HIV medicines Truvada and Atripla lost patent exclusivity in the U.S. in late 2020, leading to lower sales for both therapies. Revenue from Truvada dropped by nearly 87% to $67 million in the quarter, while Atripla's sales declined by 76% to $27 million.
Meanwhile, sales of Gilead Sciences' Hepatitis C virus franchise decreased by 8% year over year to $429 million, which it blamed partly on lower patient starts.
Image source: Getty Images.
On the bottom line, Gilead Sciences' net income based on generally accepted accounting principles (GAAP) does not give an accurate picture of its performance compared to the previous fiscal year, since during third-quarter 2020, it recorded a one-time expense related to an acquisition. However, the company's non-GAAP net income increased to $3.3 billion, compared to the $2.7 billion it recorded during the year-ago period.
Obviously, Veklury played a central role in the biotech's revenue and earnings increases. But sales of this medicine will fluctuate along with cases of COVID-19, not to mention that several new coronavirus therapies recently earned approval and will likely be taking some market share away from Veklury. With these dynamics in place, can investors bet on Gilead Sciences moving forward?
Potential avenues for growth
The good news for Gilead Sciences is that, despite the loss of patent exclusivity of Truvada and Atripla, it remains one of the leaders in the HIV drug market. For instance, the company's medicine Biktarvy is the top prescribed HIV treatment in the U.S., and Gilead Sciences' Descovy boasts a 45% share of the HIV pre-exposure prophylaxis (PrEP) market.
According to the company, the pandemic has affected treatment levels for HIV patients. As the outbreak (hopefully) subsides, investors should expect both Descovy and Biktarvy to continue to record strong sales. New approvals in this market could further bolster Gilead Sciences' dominance. In June, the company submitted an application to the U.S. Food and Drug Administration for lenacapavir, a potential long-acting treatment for some HIV patients.
"Lenacapavir would become the first available six-month long-acting subcutaneous injection treatment for HIV," according to Gilead Sciences' chief medical officer Merdad Parsey. But Gilead Sciences is also looking elsewhere to improve its financial results. For example, management said that it is building a new manufacturing facility in Maryland that will help the company automate some of its processes and reduce costs; this new facility should become operational sometime this year.
Gilead Sciences also boasts a rich pipeline with several dozen programs. The company plans on significantly expanding its lineup by adding new products -- or expanding the labels of existing products -- between now and 2030. Gilead Sciences is planning for life beyond the pandemic -- and the boost provided by Veklury -- pretty well. And given that the biotech company currently looks undervalued, it seems like a solid buy at current levels.
As a bonus, Gilead Sciences offers an above-average dividend yield of 4.14%, and it boasts a very conservative cash payout ratio of 37.6%. The biotech has raised its dividend payouts by 36.5% in the past five years, which makes it an excellent option for income-seeking investors, as well as for those looking for some stability in an otherwise volatile market.
