- The time to buy is when one is fearful. I see much more upside potential in this stock as opposed to downside risk.
- HCV (Hepatitis C Virus) drug sales will eventually bottom out. Epclusa and the likes of SOF/VEL/VOX will keep Gilead the market leader in this space.
- NASH could be a game changer if Gilead gets to market first. It now has its GS-4997 drug advancing to phase III trials.
Gilead Sciences (NSDQ:GILD) is currently trading at an earnings multiple of 6.66 and a share price of $75.83. Compared to competitors such as Celgene (NSDQ:CELG) and Amgen (NSDQ:AMGN), Gilead looks really cheap from a valuation perspective. But is it really? I have been vocal in my bullish opinion about this stock for some time now. In fact, I believed the stock will not stay under $80 for long and I still maintain that point of view despite the share price dropping a further for a short spell since I made that call. The company announces its third quarter earnings on the 1st of November where the expected earnings per share are $2.85 on revenues of $7.5 billion. Both figures are approximately 10% lower than last year's numbers which is why the market is punishing the stock at present. So should you go long on the stock?
Strong Competitive Advantage
Gilead attracts me because of its strong competitive advantages, which is why I see far more upside potential than downside risk at this stage. Yes, the company has had a poor 2016 but even with its HCV woes, Gilead will still bring in about $30.5 billion this year in top line revenue, which will only be slightly over $2 billion short of the company's top line last year ($32.63 billion). Does a $2 billion reduction in top line warrant a share price collapse of 33%+? (see chart).
This is another factor many bearish analysts are missing. The chart above illustrates that the biotech ETF (NASDAQ:IBB) lost 27% since it formed its top in the summer of 2015. Gilead's share price definitely got caught up in this.
However, sometimes the market can get too hung up on short term trends. Yes, analysts have 2017 revenue projections of $29.23 billion coming in slightly lower than 2016 but we are not talking about a huge difference here (just over $1 billion). In fact, if Gilead's Epclusa in the HCV space can prove a bit hit in the quarters to come, these future top line projections could be on the lower end by quite a sizable margin.
The Hepatitis C Market Will Ultimately Settle Down & Revenues Will Consolidate
So why do I see more upside potential rather than downside risk? Well apart from the company's strong balance sheet, robust cash flows and low valuation, I like how Gilead has responded to its HCV situation. By making this point, I believe that ultimately HCV sales will bottom out and Gilead will remain the dominant player in the industry. Remember that there are something like 3 million people who have hepatitis C in the US, but only 1.5 million have been diagnosed. What I like about Epclusa is that it is cheaper than its counterparts, has a single tablet treatment regimen and is primarily for genotype 2 & 3 patients.
Gilead Will Keep Its Margins Soaring In Hepatitis C Drugs Due To A Strong Pipeline
Although these genotypes are a smaller market than what the likes of Harvoni serves, competition should be less which will lead to Gilead capturing market share quite quickly here. Furthermore, besides Epclusa, the company has another important phase 3 drug trial underway in this space. The regimen is called SOF/VEL/VOX and if approved would be a "salvage" option for patients who have not responded to traditional treatments. Therefore I'm convinced that sooner or later there will be a bottom in this market for Gilead. Too many analysts are comparing this year's numbers with last years (where there was a record number of patients starting treatments) wrongly. This too shall pass.
Gilead's NASH Offerings Will Ultimately Add To Top Line Growth
Another area where the company is showing promise is the Nonalcoholic steatohepatitis (or NASH) area, which is basically a liver inflammation caused by fat build-up. There are no drugs approved in this market at present although competitor Intercept Pharmaceuticals is probably ahead of the chasing pack here as it has phase III trials underway at present. NASH is expected to be worth $25 billion by 2025 and Gilead definitely has the balance sheet to acquire companies or do the in-house work needed to develop its own drugs. In fact, Gilead has a strong Nash pipeline at present and recently announced phase II results for its ASK1 inhibitor GS-4997 which were impressive. This drug will now go forward for phase III trials which would mean that Gilead would definitely be close to gaining first movers advantage in this area (if the drug gets approved by the FDA).
Therefore investors should be able to see that Gilead has limited downside risk at this stage. When you combine its pipeline, TAF growth in the HIV space, its balance sheet and valuation, the stock should easily get back to $100+ a share once Hepatitis C drug sales settle down. Furthermore, watch its Nash phase III trials. If these drugs can get to market first and be extremely effective, Gilead will get another guaranteed income stream for a considerable number of years.