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Focus Article: Gilead Sciences (GILD)

  • February 28, 2012

Gilead Sciences (GILD) $45.19

The Company:

Founded in 1987 in Foster City, California, Gilead Sciences is a research-based biotech company that focuses on HIV/AIDS, liver disease and cardiovascular/metabolic and respiratory conditions. While the company has products to treat cardiovascular and respiratory diseases, it derives a bulk of its revenue and profits from antiviral drugs used to treat HIV and Hepatitis B.  Gilead has two billion dollar antiviral drugs called Altripla and Truvada, which are both used in the treatment of HIV. Truvada is a combination of two different drugs and Altripla is a combination of Truvada and yet another drug.

Gilead has not been shy when it comes to acquisitions and has expanded its product portfolio through a series of acquisitions. On January 17, 2012, the company completed its largest acquisition through the $11 billion purchase of Pharmasset after paying a hefty premium of 89% for the company. The company expects to develop all-oral regimes for the treatment of HCV (Hepatitis C) infected patients with this acquisition.

The company generates nearly a billion dollars in operating cash flow a quarter. If Pharmasset’s HCV drug called GS-7977 gets FDA approval by 2014, it has the potential to become another billion dollar drug for Gilead. According to Gilead, “the global prevalence of hepatitis C is about 5 times as much as HIV. This is a huge worldwide burden. Patients with hepatitis C, as they get older, progress to liver failure and liver cancer. “ Globally about 170 million people are chronically infected with the hepatitis C virus.

The stock, which was undervalued and in a tight range through most of 2011, broke out in 2012 with a gain of 37% to over $56. Following the announcement on February 17 that a Phase II study of GS-7977 and another drug ribavirin failed to show efficacy in treating null responders (patients with Hepatitis C that have shown insufficient response to prior therapy), the stock dropped sharply. Shortly after this plunge, a director of the company purchased 10,000 shares as highlighted in the daily reports last week.

Business Statistics and Financials:

While growth at Gilead has slowed down, the company managed to post a 10% increase in full year 2011 revenue to $8.1 billion. Full year operating cash flow came in at $3.64 billion, implying operating margins of nearly 45%, one of the best in its industry. Non-GAAP earnings per shares were only up 5% to $3.86.

Gilead had a strong cash rich balance sheet before the Pharmasset acquisition. Following this acquisition, the company took on $5.9 billion in debt but based on its strong cash flows, the net debt on the balance sheet is very much manageable.

Competitors:

Given below are some of the largest biotech competitors of Gilead. We have also included Roche on account of its ownership of Genentech. The EV/EBITDA number for Gilead is probably closer to 10 now following the acquisition and the extra debt.

StockSymbolMkt CapEV/EBIDTAP/BOperating Margin
Gilead SciencesGILD34.03B7.694.9646.08%
AmgenAMGN53.68B8.62.8333.96%
CelgeneCELG32.51B17.115.9431.16%
BiogenBIIB27.79B12.794.435.11%
Alexion PharmaceuticalsALXN15.58B58.9213.8531.19%
RocheRHHBY.PK150.00B8.8311.1932.92%

Insider Buying:

Normally we like to see more than one insider purchase but in the case of Gilead Sciences only one insider picked up stock over the last six months.

OwnerRelationshipDateCost# SharesValue($)Total Shares
Per Wold-OlsenDirectorFeb-22$44.0010,0004,39,95526,097

Conclusion:

The investment thesis for Gilead rests on the fact that the company is currently a cash cow generating as much as $3.64 billion of operating cash flow for full year 2011, trades at a reasonable valuation of less than 10 times EBITDA and not only has a strong HIV franchise but has now also purchased the strongest candidate for HCV treatment. The company did take on debt to complete the acquisition of Pharmasset and the price paid for that bet has been steep. This bet will only pay off if GS-7977 and successor drugs achieve the same level of sales as Gilead’s HIV drugs or more.