Analysts' Choice: Gilead Can Beat Market's Targets

11/9/2015


  Recent Price
$109
  Dividend
$1.72
  Yield
1.6%
  P/E Ratio
9
  Shares (millions)
1,503
  Long-Term Debt As % Of Capital
42%
  52-Week Price Range
$123.37 - $85.95

Gilead Sciences ($109; GILD) stands out from the biotechnology crowd in several ways:

• Its $164 billion stock-market value is the largest in the industry.

• Over the last 12 months, Gilead's sales growth of 52% doubled the industry average, while its per-share-profit growth of 94% dwarfed the industry average of 18%.

• At nine times trailing earnings, Gilead trades 66% below the industry average P/E of 27.

But a discussion of Gilead's investment appeal usually begins and ends with the prospects for its hepatitis C drugs, Harvoni and Sovaldi, which continue to power the company's impressive growth.

In the September quarter, Gilead earned $3.22 per share excluding special items, up 75%, while revenue jumped 37%; both results topped expectations. In contrast, analysts expect both revenue and profits to decline slightly in 2016, targets that in our view overplay the risks. Gilead is a Focus List Buy and a Long-Term Buy.

The hepatitis C story

Gilead launched Sovaldi in December 2013 and Harvoni in October 2014. Both drugs made immediate headlines for their high cure rates and high prices. Despite widespread criticism of the drugs' cost and some insurers refusing to cover them, Gilead's drugs treat 90% of hepatitis C patients in the U.S.

More than 600,000 patients have used Sovaldi. The company estimated 60,000 U.S. patients were treated with Sovaldi or Harvoni in the September quarter, with expectations for a flat treatment rate into 2016 as enough new patients cycle through the treatment to replace those who stop taking the drugs. Not exactly the stuff of which double-digit growth is made.

About 80,000 patients started taking Gilead's hepatitis C drugs in Europe during the nine months ended September, and Harvoni launched in Japan in September. These trends suggest usage of Harvoni and Sovaldi should continue to grow overseas. However, many foreign countries have forced Gilead to offer huge discounts.

Gilead has tried to calm investors by projecting a long growth run for its hepatitis C franchise, citing a massive, if unknown, population of undiagnosed patients. In many areas of the U.S., the prevalence of hepatitis C is roughly double what researchers expected. The World Health Organization estimates more than 185 million people worldwide have hepatitis C.

Beyond hepatitis

Perhaps just as important, Gilead tackles more than hepatitis. HIV drugs generated 34% of Gilead's revenue in the nine months ended September, and three new drugs are awaiting approval in the U.S. and Europe. Outside of HIV and hepatitis C, Gilead has drugs in seven phase III trials and 22 phase II or phase I trials.

Since the start of 2014, Gilead has spent about $10 billion on stock buybacks and another $3.9 billion to retire warrants, lowering its share count 11%. At the end of September, the company had more than $11 billion left on its repurchase authorization. We expect continued buybacks.

Obtain an annual report for Gilead Sciences Inc., 333 Lakeside Drive, Foster City, CA 94404, (650) 574-3000, www.gilead.com.

GILEAD SCIENCES
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '15
3.22
vs.
1.84
37%
120.37
-
86.00
12 - 8
Jun '15
3.15
vs.
2.36
26%
123.37
-
95.38
13 - 10
Mar '14
2.94
vs.
1.48
52%
107.77
-
93.18
13 - 11
Dec '14
2.43
vs.
0.55
134%
116.83
-
85.95
19 - 14
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
24.89
8.03
0.00
116.83
-
63.50
14 - 8
2013
11.20
2.04
0.00
76.11
-
36.94
37 - 18
2012
9.70
1.95
0.00
38.56
-
20.67
20 - 11
2011
8.39
1.93
0.00
21.75
-
17.23
11 - 9
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
100
98
92
98
91
97
53

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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