Gilead Sciences (GILD) is an USD 84.5 bn market cap biotech company and one of the largest biopharmaceutical companies globally. Last year, GILD generated revenues of USD 30.4 bn and reached net profits of USD 13.5 bn realizing a 44% net profit margin.
My conviction for GILD is mostly based on the company’s HIV segment. GILD has been an innovator for the treatment of this disease for years and is by far the most important provider of drugs to HIV patients. Given the lifelong treatment requirement, increasing life expectancy and a steady flow of new patients, GILD dominates a highly attractive market. This is specifically the case for the US where the company’s drugs treat 3 out of 4 patients.
Based on my valuation, I bought this segment at eight times net profit, while ascribing little value to GILD’s other revenue generating segments and the company’s new product pipeline. For instance, my valuation of the company’s other important segment HCV is 40% covered by expected 2017 free cash flow generation.
The major known risk emerges from GILD’s HIV regimens becoming obsolete. However, GILD has proven more than once that they can make themselves redundant before the competition is able to. Management is currently demonstrating this with the successful conversion from older TDF based regimens towards recently introduced less toxic TAF based HIV regimens. Ten years from now HIV might have become a curable disease and GILD’s revenue might have vanished. This scenario has already been reflected in the market value. Evidently, expectations for the HIV segment to continue to prosper are low.
Based on the latest forecast from a leading research house, GILD will be the only top 20 pharmaceutical company with negative sales growth until 2022. The negative outlook seems to be fully reflected in the company’s market valuation. However, in the pharma industry success and failure are closely related and today’s high flying expectations for many potential blockbuster drugs will disappoint in the future. At the same time, seemingly unspectacular development programs will turn out to be highly effective game changers for the industry. I believe that the market ascribes a modest probability to the potential development of a third blockbuster franchise like for instance NASH, Cohn disease or rheumatoid arthritis. I expect GILD’s focused strategy on a small number of therapies to continue to pay off in the future. I also consider current expectations for future HCV sales to be moderate.
Over the long term, management has a strong track record in generating value for shareholders. Recently there have been setbacks with untimely share buybacks and the market waiting for an in-organic play to boost the revenue outlook. Management might be less responsive to claims from market participants than CEOs of similar sized US companies. However, I believe that they are acting for the long term benefit of shareholders.
A corporate action like GILD continuing its highly value creative acquisition path or the involvement of an activist investor might provide a catalyst for the stock price. In addition, insiders have recently reduced selling stock to a large extent. This might indicate that the share price has bottomed out.
I encourage you to read the full investment case which you can download here.
The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!