Company Description

Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. We strive to transform and simplify care for people with life-threatening illnesses around the world. Gilead's portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases, cancer, inflammatory and respiratory diseases, and cardiovascular conditions.

Obtained from: www.gilead.com/about

Potential Major Risks

When you start to dig through Gilead's annual report there are definitely some red flags that pop up. First off is the decrease in sales from 2015 to 2016 to the tune of about 8%. One of the big problems that Gilead is facing is that they are losing market share as well as price point on their HCV drugs. Combine that with the fact that treatments are going from 3-6 month to 8 week times and that their drugs are so effective they are losing long term customers because they are cured and the decreasing revenue doesn't seem short term. This wouldn't be as big of a deal if it wasn't for the fact that Gilead currently obtains 50% of their sales from this  drug category. On top of this Gilead is projecting HCV sales to be potentially 50% of the 2016 total.

While lawsuits are always lingering in the background of pharmaceutical companies reports Gilead has a suit with Merck that could potentially have a large affect on their profit margin. Currently Gilead is in midst of a fight with Merck over historical infringements that could end up costing Gilead upwards of 8 billion dollars from 2017 to 2021. That could spell a 1-2 billion dollar hit on net profit. This could end up hurting the EPS in a big way.

One of the biggest negatives that many analysts are looking at is not only the decrease in revenue but the slow in growth that was shown this past year. Too many eggs in one basket most of the time ends up like this, with generics catching up and other companies getting in on the "secret sauce". With the lack of a diversified portfolio of drugs currently selling Gilead risks losing a large chunk of its income if these continue to slide.

The final risk factor is the decrease shown in the net cash flow and an increase in total debt through issuing of senior notes. Adding debt never seems great but we can get into that later.

Potential Major Rewards

 One thing that I love to take a look at in biotech companies is the Research & Development expenses on a year to year basis. This past year Gilead added 69% to its previous expense (about 2 billion dollars) mainly due to clinical trials moving to later phases. This is always a good sign to see as it shows continued progress in getting new drugs to the market place. 

Currently the pipeline has 9 drugs in Phase 3 clinical trials and 16 in Phase 2 clinical trials. Of the Phase 3 drugs, the two HIV drugs may have the best future growth implications. The facts are that there may not be much help from these in 2017 though so we may have to wait a bit while Gilead continues their development.

One of the biggest things going for Gilead and its potential for future success is the amount of cash available to purchase other companies and drugs. With over 30 billion dollars available Gilead could make a run at some companies with pipelines that have huge potential. If Gilead can find a suitable company to add to their already strong portfolio then the stock price could explode and be back in the triple digits. Unfortunately for investors this takes time and patience, two things that are hard for most. 

Fundamentals

Let's start with the slowing growth here. At some point every blockbuster drug gets infringed upon and loses some market share. When looking at Gilead its EPS has grown from 1.71 in 2007 to 9.94 in 2016. Pair that with over 30 billion in revenue in 2016 in comparison with 4 billion in 2007 and the growth rate over 10 years looks pretty good.

When comparing Gilead to other bios (chart above from 2016 to current) out there it becomes apparent that the market is currently shunning them in a big way. Currently priced at a 6.75 P/E it is well below AbbVie (18.11), Amgen (15.89), and JNJ (21.20). Price to sales is also somewhat lower, 3.03 compared to 4.19, 5.35, 4.83 respectively. For the year it is down almost 34% which may mean opportunity exists here as it has fallen out of favor. In addition the fact that it has very manageable debt in comparison to other bios make me a big fan.

The dividend for Gilead is also attractive, standing at 3.06% (2.08) with a minimal 18% payout ratio and, although new to the dividend scene, was increased this past year. Gilead seems to currently be committed to returning money to their shareholders so continued dividend growth seems likely.

My Opinion

Here's my take on Gilead: when a company explodes with the type of growth that they have scene in the past 10 years (even more so in the past 4-5) you are bound to have slow downs. Pair that with some heavy litigation, a string of scrutiny on the industry in general and a lack of diversity in the pipeline and you end up with the market making a company suffer more than they should. I don't like to look at projected earnings just as I don't stare into a crystal ball and try to guess lottery ticket numbers, but what I can see is multiple drugs in Phase 3 trials, a company with ample amounts of cash to make a difference, and a dividend that is not only sustainable but can grow. Remember, I am not looking for this year, I am looking for years to come.

With that I must say:

Gilead Sciences Inc. is a BUY.

Full Disclosure: 
Long GILD