What if I told you that there’s a company that cures Hepatitis C and leader in treating HIV, sells successful Hematology/Oncology, Cardiovascular, and Inflammation/Respiratory drugs, and has a robust pipeline of Phase 2 & 3 products?
Even more intriguing, they’ve increased revenue 37% and earnings 68% in the past 12 months, and has $15.1B in cash. It trades at a forward P/E ratio a tad under 9, sports a PEG of 0.6, and enterprise value of 7.3x EBITDA (competitor median is 17.8x), all lower than its comparable companies.
Would that be something you’d be interested in (extra Bob Ryan)? If so, look to Gilead to be your preferred [drug] dealer.
Strengths & Opportunities:
-Superior product and dominate market share of Hep C: Analysts estimate Harvoni and Sovaldi bringing in $17B in 2016, while only $2.5B for GILD’s closest competitor AbbVie’s Viekira Pak and Technivie. Less than three weeks ago, the FDA said that ABBV’s drugs may cause serious liver injury, even fatalities, in patients with an advanced liver disease and told them to use warning labels.
– Leader in HIV treatment: Lesser known and advertised, is their 87% ownership of the +$10B HIV market through Stribild and Truvada, as well as others.
-Defending and improving it’s two cornerstones: For Hep C, positive Phase 3 trial results were reported on a combo of Sovaldi and a new experimental drug, which would become the first treatment for all six genotypes of Hep C. Advantage for insurers because no more genotype testing needing, and hence, less costs.
As for HIV, GILD received FDA approval for the fist TAF- based HIV drug, Genvoya, which is as effective as Stribild, but with 1/10th the dosage and less bone and kidney side effects.
-Financial strength: In addition to the figures above, Free Cash Flow (ttm) is $17.9B, $3B more than the closest major pharma. Also, Gilead is basically three times more efficient in producing revenue per employee than similar comps ($3.6M vs. $1.3M for both BIIB and CELG).
-Potential cure for both Hep B and HIV: GILD’s GS-9620 has massive potential. Hep B- Currently in a Phase 2 review and human trial after positive results displaying a “functional cure” in chimps and woodchucks. For HIV, it has shown promising results in Phase 1 review.
Quick science note, GS-9620 aims to “kick and kill,” in which latent viral cells are narced out (drug pun intended) of hiding for immune system can attack DEA style.
-Acquisition in the works? THE major catalyst the market is waiting for. In early September, GILD announced a $10B debt offering, but already had $7.4B in cash, $1.2B (ST) and $6B (LT) investments, and minimal debt. They bought back shares, trimmed debt, and paid dividends, but you don’t need that much ammo unless your hunting big game.
Weaknesses & Threats:
-Super competitive industry in curing Hep B and C. Merck is coming out with Hep C in 2016 and there is a major race to find cure in Hep B. Current Hep B population is 350M vs. 150M in Hep C.
-Patents expiring (Hep C in late 2017 and HIV treatments starting in 2018), and the potential that the improved cornerstone drugs may not be as commercially successful.
-People will actually be cured; I know this sounds cruel, but it’s the reality of the situation. They will not have returning customers, and customer acquisition cost is expensive.
-Current political landscape and stigma associated with extremely high price of Harvoni. However, compared to Viekira Pak, it’s only $10K more and much safer. Also, tell me a disease that you can recall that has been cured since Polio?
Price Target:
My current price target is $183, which is based a combination of comparable’s adjusted median EV/EBITDA multiple, Exodus, and a couple other sources. In a later post, I will discuss my method in developing price targets/valuations, and through probabilities, how a Margin of Safety is achieved and the impact it has on your position size.
Conclusion: Of all the large caps, I encourage the readers to pitch me on a company that offers a better combo of high upside and low downside. This is by far my largest position in my actively managed accounts.
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good work
Thank you Dr. Fly, needed to bust out the highest quality of posts on iBankCoin’s birthday.
Awesome job… I have trouble valuing GILD myself — think multiples here don’t work and DCF is difficult given patent cliff… who knows what this looks like in 3 years…
Thank you DJ Marcus. Big fan of your insight and opinions; especially enjoy your knowledge and analysis of the credit markets. I’m not shy to say I want to learn more about them.
As for valuing GILD and most stocks, my preference is to use enterprise value multiples because you are able to see what the market is pricing its competitors at. If you believe that the revenue and/or earnings growth, product selection, financial strength, etc. is more appealing for your target as compared to its competitors AND it is trading at a lower multiple, then you have some comfort in placing a premium multiple on your target. If your target’s multiple is MUCH less (as is GILD’s in my opinion), you can increase your multiple conservatively but still find upside.
I also like enterprise value much more than P/E’s, due to EV taking into account debt levels, cash, preferred equity, minority interest, etc. Not a huge fan of DCFs due to the difficulty in projecting cash flows out so far. Doesn’t work for me with GILD because of the uncertainty of determining future CFs. However, when I compare GILD’s current products, pipeline, and financial strength to it’s competitors, I have the confidence that they should be trading at a higher multiple. More goes into my price target than EV multiples, and I will be sharing a post soon regarding that. Thanks for the feedback and discussion, that’s what should be driving my content!
Hillary and dead broke boomers make biotech a no go.The drug prices are all fantasy. Why else do they sell at single digit price to supposed earnings?
@Boyaj Thanks for the breakdown & I look forward to more posts.