Should You Buy Gilead Sciences Inc?

  • Gilead is being pounded by the success of its Hepatitus C cures.
  • The Price/Earnings multiple is below 8 as analysts see falling sales with fewer victims.
  • Do not expect a hasty or conventional move.

Gilead Sciences (NSDQ:GILD) is the success story Wall Street loves to hate.

The company's two hepatitus C drugs -- Sovaldi and Harvoni -- have performed miracles in the field, curing 90% of the patients who take them. The cost of these drugs in the U.S. is extremely high, but it is more reasonable elsewhere, where sales are actually rising.

Still, analysts see a declining top line over the next four years, as more victims are cured, and have cut the price of the shares. At about $87, they are selling for just 7.5 times expected 2016 earnings. Still, Gilead stock is worth over $116 billion and it has over $6 billion in cash. It has the means to buy other drugmakers, and is motivated to do so. Any purchase of a drug with a long runway could send the stock higher.

Also read: Is Gilead Stock A Buy At Current Price?

Right now, Gilead shares are being buoyed by its win in a patent suit with Merck (NYSE:MRK) on those hepatitis drugs, at the same time, it is being slammed on new HIV drugs with opponents saying it delayed its patent finding to extract maximum profit.

Both of these controversies are less relevant to the investment case than what Gilead does with its enormous wealth.

One option is to buy Medivation (NSDQ:MDVN), which needs a white knight to fend off the embrace of Sanofi (NYSE:SNY). Medivation has an interesting line of cancer drugs, including drugs against breast cancers that resist standard treatments. Medivation’s compounds inhibit the actions of specific enzymes within tumors and need to be investigated before they are released.

Medivation is worth about $10 billion but would cost at least $15 billion in a bidding war. That’s over 15 times sales, and a poor first quarter has some analysts questioning the growth story. Medivation is affordable, it’s the move Wall Street wants, and it’s a move Gilead is unlikely to make.

Another option is to buy part of Valeant Pharmaceuticals (NYSE:VRX), a motivated seller given its fall from over $200/share to the low-20s, and its high debt levels. But this would go against Gilead’s corporate culture, which is to go after home run compounds that cure dreaded diseases, the approach it took with hepatitis C.

I think it far more likely that Gilead will approach a company like Adaptimmune Therapeutics Plc (NSDQ:ADAP), a British firm worth under $1 billion that is working to develop a platform of auto-immune drugs for cancer based on T-cell receptors, compounds that can be bound to the peptides in cancer cells. Immunotherapy is a hot topic in cancer today because of the success of Merck’s Keytruda, which reportedly sent former President Jimmy Carter into remission from advanced brain tumors. 

ADAP is not just working on a single drug, but a platform for drug development. It has a partnership with GlaxoSmithKline (NYSE:GSK) on one compound. But this is more like the kind of potential home run that Gilead likes to focus on.

If you’re buying Gilead now, you’re betting that managers like CEO John Milligan can make the right choice on a purchase and find another Harvoni. It seems unlikely that Gilead will be rushed in this effort, or that it will accept anything less than a potential blockbuster for purchase.

Investors who expect Gilead to become just another drug company are going to be disappointed. Just know that its Price/Earnings multiple will rise as its hep-C line matures and that it could become a true speculation after it makes its move.

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  • I do not have any business relationship with the companies mentioned in this post.
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