GILD - Gilead Science

[Wilson-TPC]

If this already has a post up, I apologize, but I didn't see one.

 

Surprisingly GILD is a value stock if you look at the forward P/E (10X).

 

I think sell side is still being stupid on this one. Earnings potential according to my rough back of the napkin estimate is $14 per share for 2015. It's currently trading at about 6.5x forward P/E (my estimate.) Reminds me a whole lot of Micron, when sell side couldn't do 1+1.

 

Its blockbuster hepatitis C drug has garnered record profits, but also record attention/scrutiny.

 

Would love to hear your thoughts on this!

 

 

[PatientCheetah]

I am usually uncomfortable buying a stock that's going up parabolically. There already are political pushbacks to the high drug prices. The key question is how long these high prices can persist and I have no idea. I have made a lot money on Micron. I don't think the situation is comparable. Micron's industry experienced a structural shift and now its an oligopoly. While the two trade at comparable multiples, there is far greater certainty in Micron's future sustainable ROE than Gilead's IMO. Gilead does have a faster growing end market than Micron.

[peter1234]

If this already has a post up, I apologize, but I didn't see one.

 

Surprisingly GILD is a value stock if you look at the forward P/E (10X).

 

I think sell side is still being stupid on this one. Earnings potential according to my rough back of the napkin estimate is $14 per share for 2015. It's currently trading at about 6.5x forward P/E (my estimate.) Reminds me a whole lot of Micron, when sell side couldn't do 1+1.

 

Its blockbuster hepatitis C drug has garnered record profits, but also record attention/scrutiny.

 

Would love to hear your thoughts on this!

 

I usually get uncomfortable valuing companies on forward earnings.

 

High forward earnings make any stock look cheap.

 

I guess it depends on how comfortable you are with the level of forward earnings and what probability you assign to it.

 

If something is reasonable on current earnings and cheap on some reasonable forward earnings then it looks interesting to me.

 

If however, it is expensive on current earnings and cheap on some aggressive forward earnings, then I am much more skeptical.

 

Don't know Gilead but Pharmas usually have risks in drug discovery, patent expirations, generics, drug regulation, re-imbursement uncertainty, competing drugs, side effects.

 

;)

[mankap]

I understand that y end of 2014 we will a competitor drug for Gilead's Hep C drug.

The questions is of the new drug is priced lower than Sovaldi, what will be the impact on Gilead?

Will you forward earning forecast hold good in that case?

[sswan11]

I don't know the answer, but this is from Morningstar:

 

Economic Moat

Karen Andersen 28 July 2014

We assign Gilead a wide economic moat rating. We think

patent protection on newer HIV regimens as well as the

recent Food and Drug Administration approval of Gilead's

oral hepatitis C drug Sovaldi (sofosbuvir) will be enough

to ensure strong returns for the next couple of decades,

making visibility on profits clearer at Gilead than at many

of its large-cap biotech peers. We think Gilead is capable

of gaining $11 billion in hepatitis C-related sales in 2014,

or roughly 70% of our estimate of the global market this

year.

[Wilson-TPC]

http://hepatitiscnewdrugresearch.com/sofosbuvir-gs-7977ledipasvir-gs-5885.html

 

The sofosbuvir/ledipasvir will pretty much make any competitor look like a joke. The only real risk I see to GILD not earning my estimate is regulatory intervention. Other than that, its hepatitis drugs are still pending approval in Japan and other big countries. It's only on sale in France and Germany for Europe.

 

This is a very idiosyncratic risk investment. Broad market shouldn't have too much of an effect on the performance.

 

Current run rate EPS for 2014 is 10x P/E, fyi.

[peter1234]

July 31, 2014 6:30 pm

Drug pricing: Bitter pill

By Andrew Ward

 

Interesting article in FT.

 

http://www.ft.com/cms/s/0/f3ede8ae-189c-11e4-933e-00144feabdc0.html

[valuedontlie]

The valuation on GILD is still a bit surprising to me. Not trying to play the relative valuation game but there isn't a legitimate pharma/biotech company out there trading below 16-17x earnings while GILD sits at 10x.

 

I understand the concentration risk in a few drugs and future patent expiry making the medium-term a bit murky but this is a cash-flowing business with a great balance sheet.

 

Reminds me of ENDP spending a few years below 10x earnings until capital allocation came into play.

 

Any thoughts on this one?

[jawn619]

The valuation on GILD is still a bit surprising to me. Not trying to play the relative valuation game but there isn't a legitimate pharma/biotech company out there trading below 16-17x earnings while GILD sits at 10x.

 

I understand the concentration risk in a few drugs and future patent expiry making the medium-term a bit murky but this is a cash-flowing business with a great balance sheet.

 

Reminds me of ENDP spending a few years below 10x earnings until capital allocation came into play.

 

Any thoughts on this one?

 

I think the valuation of Gilead is relatively fair. Gilead is huge, with 150B in market cap. With 12B in trailing net income, most of which come from solvaldi/harvoni. The market thinks, and I believe rightfully so, that Gilead won't be able to replicate that kind of success with any of their other drugs.(it already has a huge target on it's back from all the big pharma with it's existing hep c product). If it were a 150 million market cap with 15 million in earnings it wouldn't be that hard to replace 15 million in earnings but just the sheer size of the profits, it would have to cure cancer and then be able to price gouge the patients.

 

I view it as Gilead basically hitting the lottery by buying a biotech that cured hep c, and even more fortunate to basically be able to charge any price to it's patients because they're about to die. Basically they go to their patients and say pay 80K+, and we'll cure your HEP C. It's worth it to the patients because they're going to die without it.

[Ross812]

The market seems to worried Sovaldi will be replaced by a HCV pill with a shorter treatment duration in a couple years. Meanwhile, Gilead is working on their own improvement for Sovaldi and I have heard from a few friends working in the biotech industry that they believed GILD competitors were working on injection based treatments rather than oral based treatments.

 

GILD at 10x earnings is ridiculous to me. One of the best pharma companies out there produces a hit drug and the market discounts them 50% because the blockbuster is too good to last? If Sovaldi only lasts another two years before revenue being halved, GILD still appears to be priced a little cheaply with their drug pipeline thrown in for free. 

[valuedontlie]

The valuation on GILD is still a bit surprising to me. Not trying to play the relative valuation game but there isn't a legitimate pharma/biotech company out there trading below 16-17x earnings while GILD sits at 10x.

 

I understand the concentration risk in a few drugs and future patent expiry making the medium-term a bit murky but this is a cash-flowing business with a great balance sheet.

 

Reminds me of ENDP spending a few years below 10x earnings until capital allocation came into play.

 

Any thoughts on this one?

 

I think the valuation of Gilead is relatively fair. Gilead is huge, with 150B in market cap. With 12B in trailing net income, most of which come from solvaldi/harvoni. The market thinks, and I believe rightfully so, that Gilead won't be able to replicate that kind of success with any of their other drugs.(it already has a huge target on it's back from all the big pharma with it's existing hep c product). If it were a 150 million market cap with 15 million in earnings it wouldn't be that hard to replace 15 million in earnings but just the sheer size of the profits, it would have to cure cancer and then be able to price gouge the patients.

 

I view it as Gilead basically hitting the lottery by buying a biotech that cured hep c, and even more fortunate to basically be able to charge any price to it's patients because they're about to die. Basically they go to their patients and say pay 80K+, and we'll cure your HEP C. It's worth it to the patients because they're going to die without it.

 

That's fair. I guess the question becomes how long does the HCV gravy train last and what do they do with the cash it generates? They've already partially answered the 2nd question with $15bn in announced buybacks and ~$2.75bn in dividends/year.

 

I agree that it becomes difficult to offset 40% of ~$28bn in revenue but relative to the cash generated it is not insurmountable. ABBV faced/faces a similar situation with Humira making up 63% of 2014 revenue (though they are launching a rivaling HCV drug).

[LesPaul]

Initiated a position in GILD on the premise that they continue to generate lots of cash, hold lots of cash and are doing something with it (buybacks + dividend) and that its multiples are still reasonable in my opinion. And that's pretty much it!

 

My understanding is that management is competent and I'm not of the opinion that it's necessarily immoral to charge what they charge for the cure to HepC.

 

Admittedly, I don't know what will happen with their current cash-cow drug and I don't know how to properly evaluate their pipeline for upcoming drug products.

 

Insiders have sold and continue to sell occasionally; however, insider sells have usually been followed by increases in SP. I may even buy the argument that their insider sales are planned in advance regardless of price.

 

I know it doesn't look like the most robust thesis, but at least I am aware of the shortcomings of my reasoning and hopefully can continue to reevaluate as more information comes forward or the more I continue to read about GILD.

 

I would love to hear others' thoughts on GILD if you have them.

[Scudbucket]

What do you think about management's track record of capital allocation?

 

Do you think they will buy another company with their cash flow or simply return cash via dividends and buybacks?

 

To what extent are people paying up for earnings?  In other words, at this price, if they fail to meet expectations, what's the downside?

 

At this price, are you paying for them to simply meet expectations or are existing expectations below what you think they will actually earn?

[feynmanresearch]

Gilead Sciences( GILD) is a no-brainer investment

[Liberty]

Gilead Sciences( GILD) is a no-brainer investment

 

Why?

[jschembs]

Let us know the other no-brainers out there, thanks.

[feynmanresearch]

Gilead Sciences( GILD) is a no-brainer investment

 

Why?

Gilead is a great company, with strong cash flow generating ability, great balance sheet and an absurd low multiple compared to its peers. To put this in perspective, Gilead competitors such as (ABBV, CELG) are trading at way higher multiples, despite not being nearly as successful as GILD. These companies are also heavily dependent on one or two drugs, yet the market is rewarding them to sky high levels, while unduly punishing GILD.

 

The market is over concerned with GILD's ability to maintain its leading position in the hepatitis C and HIV market-IMO these concerns are overblown at least in the short-term. Granted, when there are high margins, intense competition can and will emerge, but Gilead will be able to maintain strong margins over the next couple of years (at the bare minimum).Additionally, the market does not seem to consider that Gilead can make a profitable acquisition or develop a new, profitable drug in the future. GILD is a prime example of a great company being punished for being great.

 

Lastly, conservative estimation of intrinsic value put GILD around $140, while more aggressive ones around $170.

 

[jawn619]

Gilead Sciences( GILD) is a no-brainer investment

 

Why?

Gilead is a great company, with strong cash flow generating ability, great balance sheet and an absurd low multiple compared to its peers. To put this in perspective, Gilead competitors such as (ABBV, CELG) are trading at way higher multiples, despite not being nearly as successful as GILD. These companies are also heavily dependent on one or two drugs, yet the market is rewarding them to sky high levels, while unduly punishing GILD.

 

The market is over concerned with GILD's ability to maintain its leading position in the hepatitis C and HIV market-IMO these concerns are overblown at least in the short-term. Granted, when there are high margins, intense competition can and will emerge, but Gilead will be able to maintain strong margins over the next couple of years (at the bare minimum).Additionally, the market does not seem to consider that Gilead can make a profitable acquisition or develop a new, profitable drug in the future. GILD is a prime example of a great company being punished for being great.

 

Lastly, conservative estimation of intrinsic value put GILD around $140, while more aggressive ones around $170.

 

No brainers have 15-20% upside?

 

Why is Gilead a great company? Could Novartis/Merck/Amgen/Celgene generate the same amount of cash flow if they had the pipeline?

 

Why do you think the concerns are overblown?

 

Let's say those monster cash flows are safe for the next 3-4 years. GILD is a $170B market cap company, Free cash flow of around $15B. In 3-4 years, GILD will be $110B company with greatly decreased earnings power. How sure are you that Gilead can develop drugs as successful as Solvadi/Harvoni? They're going to use some of the cash flow to invest in developing new drugs right? Why are they better at developing them than any other big pharma/biotech?

 

P.S. I don't mean to be condescending but would like to know your thoughts.

 

I also see the low trailing multiples to earnings and cash flow but would like to see if anyone has thought about some of the things I would mentioned above.

[rpadebet]

I tend to agree with jawn.

 

This is more difficult than it appears on the surface. It's definitely not a no brainer, at least to me.

Trailing multiples are low because of the spike in profitability due to new drugs. A lot depends on the average life of these drugs, the cash flow spent in developing new replacements, threats from cheap imitators in EM countries, regulatory pricing problems  etc.

 

Typically the market does a good job assigning a value to the pipeline relative to those of competitors. There are positive surprises sometimes, but that's a bet not an investment rationale. I don't see a clear reason why gild can come up with better drugs than equally well funded competitors.

[no_free_lunch]

I have read that they are culturally superior to most of their competitors.  Personally, being in tech, I don't buy that 2 companies with the same amount of funds for investment will product the same amount of outcomes.  Management and culture can make a huge difference and the proof is in the pudding on this one.  You should read up on them.

[rpadebet]

I have read that they are culturally superior to most of their competitors.  Personally, being in tech, I don't buy that 2 companies with the same amount of funds for investment will product the same amount of outcomes.  Management and culture can make a huge difference and the proof is in the pudding on this one.  You should read up on them.

 

Any sources you could refer me to?

Would like to understand what makes the culture superior and if it is a source of sustainable competitive advantage

[Guest Schwab711]

I have read that they are culturally superior to most of their competitors.  Personally, being in tech, I don't buy that 2 companies with the same amount of funds for investment will product the same amount of outcomes.  Management and culture can make a huge difference and the proof is in the pudding on this one.  You should read up on them.

 

Any sources you could refer me to?

Would like to understand what makes the culture superior and if it is a source of sustainable competitive advantage

 

Here's a cool story from the beginning of GILD that involves WEB

http://www.scribd.com/doc/208120113/Michael-L-Riordan-Gilead-Founder-and-CEO-and-Warren-E-Buffett-Berkshire-Hathaway-Chairman-Correspondence#scribd

[no_free_lunch]

I have read that they are culturally superior to most of their competitors.  Personally, being in tech, I don't buy that 2 companies with the same amount of funds for investment will product the same amount of outcomes.  Management and culture can make a huge difference and the proof is in the pudding on this one.  You should read up on them.

 

Any sources you could refer me to?

Would like to understand what makes the culture superior and if it is a source of sustainable competitive advantage

 

I don't know, I really don't claim to be an expert on it but pretty much any in-depth article seems to convey that to me.  Here is one I bookmarked, the article is a bit old but shouldn't matter.  Even as a non-biotech tech-worker a lot of this really speaks to me, from my experience this is not how most CEO's talk.  Note in particular how he doesn't have any silver bullets, sometimes we go internal/sometimes we go external, it's complicated, it depends.  BS CEO's won't talk like this because it makes you sound like you don't know what you're doing.  You have to have a lot of confidence and actually be focused on getting things done to think in this manner.

 

But a lot of companies have unmet medical needs as a target and claim to be innovative. What do you think you’ve done that has allowed you to be so much more successful?

 

We’re a small company, and we intend to stay small. We limit what we spend on R&D and, therefore, we keep the hurdle bar very high and work only on those few things that give us the highest probability of success.

 

How do you balance the potential conflicts between the scientists who are pursuing a technical angle and the commercial parts of the organization that are pursuing a market angle?

 

It goes far beyond just science versus commercial. We are so multidisciplinary in what we do, even in terms of the variety among specialized scientists. How do you balance all those perspectives and get the various individuals to work together as a team? We like to say that we’ve hired a number of professional athletes who have done well elsewhere to come here and work together to achieve the success that we have.

 

Gilead has only 4,000 employees and yet you generate more than $7 billion a year in revenues. How do you maintain that level of operational excellence and at the same time keep the company relatively small? There must be a lot of temptation to grow the company as other big pharma companies have grown.

 

There is, and often it takes awhile for new employees who come in from other organizations with different cultures to adapt. But eventually they realize that we’re not into empire building. We’re fortunate to have many employees in the company who have been here from the earliest days and are now in senior positions who understand that we’re not into creating a lot of infrastructure, that it is ingrained in our DNA to stay lean.

 

Many high-growth and high-margin companies don’t have that discipline. What have you done as the leader of the organization to reinforce it?

 

We work a lot with outside groups to leverage what we do. Our lean infrastructure means that we need to rely on outside organizations to complement our own expertise. We also work with key individuals outside the company to help us manage those organizations. For instance, when we deal with regulatory authorities around the world on a specific problem, we’ll hire an outside expert who is the top international person in knowing how to deal with that problem. We don’t try to do everything internally—and that’s not only in terms of operations but also intellectually. It’s very important that we reach out to the entire world, because there are enormous capabilities outside our own 4,000-person company.

 

So in many ways, for you, managing innovation means managing a network of innovators. How do you strike the right balance between organic innovation and innovation that comes from the outside?

 

We don’t really care what the balance is. Even outside innovation has to have continuous innovation internally to be successful. We want to have the best molecule for treating a certain disease. That could come internally or externally. Keep in mind that even though our R&D budget is close to a billion dollars a year, that’s still less than 1 percent of global R&D. And less than 20 new drugs are approved every year. So statistics are against you if you only focus internally.

 

You need to focus externally. But to do so effectively, you need to have very good science in-house that allows you to identify what that best molecule is. By using innovative drug assays and then correlating those assays with unmet medical needs, we are able to evaluate different chemical structures, no matter where they come from, and identify the most promising ones before we go into human clinical studies.

 

https://www.bcgperspectives.com/content/videos/biopharma_medical_devices_technology_innovation_creating_value_through_innovation/

[Guest Schwab711]

I've changed my mind.

 

http://procrasti-nation.eu/wp-content/uploads/Shut-up-and-take-my-money.jpg

 

:). I thought it was super interesting.

 

I also think that GILD could be in for a slew of problems. The patent expiration is going to be difficult as others mentioned, even assuming TAF extends their HIV dominance. HCV has competition from AbbieVie, Merck, and BMY (and I thought JNJ [through Janssen]). It is recommended that doctors review HCV updates prior to each decision because the understanding of the virus is changing that rapidly! Sofosbuvir (Sovaldi) is the current standard care treatment for HCV; a massively important designation to GILD's profitability. The concern (and I think, the cause of GILD's apparent undervaluation) is that one of the competing therapies (treatments?) for HCV will supplant Sovaldi and GILD will see a ~$7b-$8b decrease in earnings/FCF instantly! Have you handicapped this event?

 

I included some background on the 2 viruses, especially HCV. The last article I cited is especially important (not necessarily the content so much as the concern presented) in that current HCV therapies only save costs over the life of the patient. Without a single-payer health care system, the concern is that no one will want to pay for these treatments because patient mobility between insurers is relatively high. Also, this year CA became the first state to cap monthly deductibles for patients with high-priced medicines such as GILD's HCV therapies; MA and other states are close to passing similar or identical versions of this. This is going to significantly impact who and how much is paid for expensive treatments (including both HIV and HCV). Regardless of the effect of this specific legislation, it seems clear that there is sufficient appetite to drastically reduce drug prices (which have grown for well over a decade at 20%-25% rates!).

 

Unless you have some insight into these issues, I think GILD is far from a no-brainer. The multiples obviously mean nothing with biotechs because there is an expiration to their revenue streams. What good is a 12x multiple if the majority of revenue that generates those earnings will expire in 5 years? It's all about PV of future finite cash flows.

 

Histories of viruses GILD focuses on:

HCV: http://hcvadvocate.org/hepatitis/factsheets_pdf/Brief_History_HCV.pdf

http://onlinelibrary.wiley.com/doi/10.1002/cld.1/epdf

 

HIV: http://www.iss.it/publ/anna/2011/1/47144.pdf

 

Current HCV Treatment:

http://www.liver.ca/files/Professional_Education___Partnerships/Information___Resources_for_HCP/CASL_Hep_C_Consensus_Guidelines_Update_-_Jan_2015.pdf

http://www.easl.eu/medias/cpg/HEPC-2015/Full-report.pdf

 

Less technical article on HCV drugs:

http://www.medscape.com/viewarticle/849254

[feynmanresearch]

I appreciate all the different perspective on GILD. Reading a devils advocate perspective is definitely helpful in seeing what areas I might have not covered in depth or missed.

 

First, 20% upside is nothing to sneer at. That's by very conservative assumptions, as I already stated. A less conservative estimate offers a 40% upside; if you want to be even more bullish in your assumptions, you can achieve an even higher rate of upside,but let's stand on the conservative side to be safe. I don't know that many investment opportunities that currently offer that potential of upside, especially with the low level of risk that Gilead offers.

 

In regards to the question of Sovaldi being outshined by one of its competitors, current data reveals that its competitor is inferior to Sovaldi. Sovaldi is a superior product with low side effects. Unless other competitors come up with definite improvements over Sovaldi, I don't foresee it being dethroned any time soon.I don't think someone would chose a clearly inferior product when it comes to matters of life and death. I regard the probability of it being supplanted as fairly low.

 

Management also has an excellent track record at delivering value for shareholders and I don't see why they couldn't continue to do so in the future. When you have a management that has shown very good decision making abilities, its reasonable to assume that they won't falter any time soon.

 

This is a seekingalpha article from an investor, that is also an MD. I think the article offers a balanced view on GILD, and its very helpful in seeing a physicians perspective on where the drugs currently stand.

 

http://seekingalpha.com/article/3394005-gileads-stock-price-harvoni-pricing-and-the-threat-of-merck-a-physicians-perspective#comments_header