Gilead Sciences(GILD, Financial) is plying its trade in a very fast-growing market. The company is tapping the Hepatitis C market with the Sovaldi drug. This has enabled Gilead to deliver outstanding growth in recent times, and there are many reasons to believe why that trend will continue. Let’s take a look at the reasons why I think investors should consider buying Gilead Sciences.
Catalysts beyond Sovaldi
Due to the massive success of Gilead’s HCV drug Sovaldi, investors tend to neglect the fact that the company’s HIV franchise is also worth over $10 billion, and its phase III data for next-gen HIV regime called TAF should prove to be beneficial in the long-run. This STR is being evaluated in other studies, including treatment of experienced patients, patients on stable therapy, patients with mild-to-moderate renal impairment, and in adolescent patients as well.
Although Sovaldi has been the trump card for Gilead, it is Truvada that will help the company in the long run. Sovaldi sales might decline over time as it is not a treatment but a cure for Hepatitis, while drugs like Stribild and Truvada for the treatment of HIV are the strong pillars on which the company can stand for long.
Truvada is a leader in HIV treatment, as it is the only FDA-approved drug to prevent HIV in people who are at a risk of contracting the disease. Truvada is playing a key role in controlling the spread of HIV, and its sales touched the $3 billion mark in the previous year.
Dividend may be in the cards
Due to the soaring sales of Sovaldi, Gilead generated more than $4 billion in operating cash flow in the second quarter alone. Up untill now, the company had used the money for repurchase programs. But, going forward, investors can expect the company to initiate a dividend program soon. The company hasn’t ruled out initiating a dividend program, and if Sovaldi sales continue to soar, which I expect to happen, investors can expect Gilead to start dividend soon.
Competitive risks are overestimated
Now that Gilead Sciences’ stock is hovering nearing all-time highs due to the success of Sovaldi, bears have started arguing that the expected approval of AbbVie’s (ABBV, Financial) all oral HCV regimen will hurt Gilead. Bears believe that due to Sovaldi’s high price, AbbVie can potentially launch a price war on Gilead, taking a huge chunk of market share away from the company. I have always stated that Gilead will continue to dominate the market due to the better efficacy of Sovaldi.
Bernstein analysts’ believe that investors are overestimating the competitive risks because “1) there are limited tools at payors’ disposal to restrict access to Gilead’s regimen even after the availability of AbbVie’s regimen, 2) a price war is not in the interest of AbbVie and inconsistent with AbbVie’s recent statements (and Gilead’s), and 3) Gilead has counter strategies to mitigate the impact of any potential price war by AbbVie on a payor-by-payor basis.”
Downward risk
All in all, Gilead appears to be in a solid position to continue its growth. However, one important fact that investors shouldn't ignore is its high debt. Gilead's debt stands at a huge $9.8 billion, which easily exceeds its cash position of $6.47 billion. At the same time, the company has a high price to sales ratio of 10, which is pretty high considering that industry peers such as GlaxoSmithKline (GSK, Financial) and Pfizer (PFE, Financial) trade at P/S ratios of 2.95 and 3.88.
Conclusion
Given the positives, I expect Gilead Sciences to continue to perform nicely for investors in 2015. The company has a lot of tailwinds going forward and the negatives are limited. Moreover, the company may even decide to initiate a dividend program if the sales of Sovaldi continue to soar. Gilead doesn't face faces any imminent competition from its rivals in the HCV market and should continue to get better.
