Should You Buy Into Gilead Stock Now?

  • Gilead is gushing profits from its Hep-C cures.
  • Much of the cash will flow to a company with an arthritis drug now in phase three trials.
  • The 1.9% yield is certain, much more may be coming.

Gilead Sciences (NASDAQ:GILD), one of the cheapest stocks in the market today is also one of the best performing. You can get Gilead today for about 8.3 times earnings, mainly because people are skeptical the company can repeat the enormous success of its Hepatitis C cures, Sovaldi and Harvoni. These Gilead drugs are heavily-advertised, and they are super-expensive at about $94,000 per treatment, while in India the same treatment costs less than $1,000.

GILD PE ratio chart

Gilead PE ratio chart by amigobulls.com

Despite this cost, and the strain it puts on government budgets, Gilead gets its price, due to the even-higher cost of keeping people with Hep C alive, and the impact of these treatments on their lives and overall health. These drugs are a cure, nine in 10 times.

It’s as if Gilead had its own private oil that no one else has and can get anything it wants for it. During the September quarter Gilead had net income of $4.6 billion, $3.06 per share, on revenue of $8.3 billion. That’s right, more than 50 cents of every dollar this company brought in went straight to the net income line. For the December quarter, which will be reported on February 2, analysts are hoping for $3.01/share in earnings, and revenue of $8.01 billion.

To continue the oil analogy, then, this is a fracked well. It will deplete quickly, as the supply of western patients with Hep C declines. So the question for shareholders becomes, what is Gilead doing with all this money?

It’s not going to shareholders. Gilead’s dividend rate is just 43 cents/quarter. Mainly, it’s going to support a huge war chest that will be invested in other drugs. Gilead’s debt load is now nearly $22 billion, on assets of $50.6 billion, and there was almost $14 billion in cash on the books.

Gilead has put $2 billion of that haul to work buying a 15% stake in Galapagos NV (NASDAQ:GLPG), which has a rheumatoid arthritis drug called filgotinib entering phase three trials. This is a $19 billion market, and Galapagos also has other drugs in its pipeline including one for osteoarthritis, which is the type associated with normal aging. Gilead also has HIV drugs in Phase Three trials, where safety as well as effectiveness come into play, as well as drugs for pancreatic cancer and hypertension in its pipeline.

Think of drugs as wells meant to prove oilfields. A phase one trial is a pure wildcat play, a phase two trial explores whether the oil can be gotten out, and a phase three trial shows whether there’s profit in the field. A drug may fail at any step of the process, but if it’s approved and really works – like Harvoni does – it’s a real gusher. Cures for arthritis or pancreatic cancer would be real gushers.

So what you’re buying in Gilead today is a mature drug play throwing off tons of cash today, along with reasonable expectations there may be more gushers in its future, either through its own efforts of those of Galapagos. If you’re of a speculative bent, you can still get into Galapagos. If you like profits, however, Gilead is the cheapest profit gusher on the board.

You can also see Amigobulls' Gilead stock analysis video for a quick look at all the key financials.

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Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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