GILD Chart

Shareholders of biotech blue-chip giant Gilead Sciences (NASDAQ:GILD) suffered through a rough September, with Gilead's stock dipping as much as 10% before ending the month lower by nearly 7%, according to S&P Capital IQ. In dollar terms, Gilead witnessed about $10 billion in market value disappear.

Why such a rough month? It likely boils down to two factors.

By far the more pertinent of the two issues was discussion among lawmakers of a brewing war against high prescription drug costs. Presidential hopeful Hillary Clinton introduced a prescription drug plan last month that entails using the prowess of the U.S. government to negotiate prescription drug prices lower, as well as capping consumer spending on a monthly basis for eligible drugs. For Gilead this could be a problem, considering its leading hepatitis C therapies, Harvoni and Sovaldi, have wholesale costs of $1,125 and $1,000, respectively, per once-daily pill, and expected costs of $94,500 and $84,000 over a standard 12-week treatment course. If Clinton is elected president, or if this proposal finds legs in Congress, Gilead, along with other specialized drugmakers, could find themselves struggling to remain healthfully profitable.

The other issue at hand is that Harvoni's and Sovaldi's weekly prescription counts, as measured by IMS Health, have been declining at a somewhat steady pace since March. Understandably, Wall Street and investors may be reading too much into the prescription data, as it's not uncommon to see prescriptions spike initially as back-stocking of a therapy commences. But with new competition on the horizon, this dip in prescriptions is clearly worrying some investors. 

Nci Fb
Source: National Cancer Institute. 

The important question that investors need to be asking themselves here is whether or not this drop in Gilead represents a good buying opportunity. If you ask this investor, I believe it is.

Gilead Sciences has been an absolutely dominant force in hepatitis C, and I don't believe either of September's concerns can displace Gilead from earning a substantial amount of money selling Harvoni and Sovaldi. To begin with, the chances of a prescription drug reform proposal succeeding appear slim. Insurers and pharmacy-benefits managers would likely have a small revolt on their hands if Gilead's HCV drugs were on the excluded list and consumers had no access. This, along with the fear of chasing American jobs overseas by capping prices in the industry, should ensure that Gilead's HCV prices remain intact.

The other issue at hand is that Gilead's efficacy simply can't be touched (at least for the time being). Data released last month in its four ASTRAL studies showed that the combination of Sovaldi and velpatasvir provided pan-genomic HCV clearance after 12 weeks in 98% of patients. The company is unlikely to remove the equally-effective Harvoni from its genotype 1 indication, but this once-daily cocktail therapy is likely to become the new standard for all other genotypes.

Valued at less than nine times forward earnings and having generated in the neighborhood of $18 billion in free cash flow over the past 12 months, I see no reason not to consider Gilead a potentially attractive buy here.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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