Is Gilead Stock A Safe Haven From Valeant's Troubles?

  • Gilead is expecting earnings of $3.03/share, with a whisper number of $3.08.
  • Gilead has achieved incredible margins by focusing on cures for viral diseases like HIV and Hep-C.
  • Pricing based on the cost of alternative treatment is controversial but accepted.

The problems at Valeant Pharmaceuticals (NYSE:VRX) have been weighing on the whole biotech sector, whose main ETF, the iShares NASDAQ Biotech Index (NASDAQ:IBB), fell over 10% last week before recovering its previous level.

During this period Gilead Sciences (NASDAQ:GILD) has been conspicuous for making new highs, rising especially sharply last Thursday from $102/share to near $109. The march forward has continued into earnings, and it was at almost $110 on Monday morning.

Gilead Earnings Estimate

The consensus for Gilead earnings estimate is net income of $3.03 per share on revenues of $7.82 billion, driven by the company’s cure for Hepatitis C, an $84,000 treatment called Sovaldi that has won approval from insurers because it costs far less than trying to maintain a person who has the disease. The “whisper number,” an expected beat of the consensus estimates, is for earnings of $3.08/share, and anything above that will shoot the Gilead stock higher.

Pricing Based On Value OF Cure

The company first won fame for its drugs used to treat HIV, the virus that causes AIDS, and its latest compound in that area is showing promise in Phase 3 trials.  Genvoya is said to be as effective as an earlier compound, Stribild, with fewer side effects.

Gilead went public in 1992, raising $84 million. It is now valued at $161 billion and is working on cures for other major viruses, like Ebola, that are highly virulent and active in the developing world.

Ironically, it was Gilead’s approach to pricing Sovaldi in the U.S., based on the cost of dealing with the disease rather than the cost of developing the medicine, which probably pushed the whole sector into its present problems by encouraging high prices based on the value of cures rather than their cost. The cost of manufacturing Sovaldi is minimal, and even at $1/each, its price in India, it’s still highly profitable as a generic.

Since receiving criticism that a drug with a 90% cure rate costs so much, Gilead has produced Harvoni, a similar pill with a 99% cure rate, priced even higher.

Still, hardball approach has done wonders for the Gilead stock, which is up nearly five-fold over the last five years and paid its first dividend, 43 cents/share, earlier this year. (There was also a 2:1 stock split in early 2013.) Out of the $8.244 billion in revenue for the second quarter, Gilead brought more than half to the net income line, doubling its pre-Sovaldi margins, when it usually brought just one dollar in four to the net income line.

Gilead Stock Trading At Cheaper Valuation

Even at its present valuation, Gilead stock sports a price/earnings multiple of just 11.64, which is well below that of the market. The reason for that is regulatory uncertainty, where it continues to soak up huge pieces of the West’s health care budget at a time when politicians are doing all they can to talk those costs down.

They won’t do it this year.

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Comments on this article and GILD stock

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jim30
bearish
The market is rightly skeptical of a company that boldly abuses its basic mission. Owning this stock is to be aligned with a self defeating strategy. Many countries worldwide have refused patent rights to Sovaldi. using pretexts that only thinly disguise their contempt for this company sociopathic greed.
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