Flu season is approaching quickly and fresh fears over a possible H1N1 epidemic have taken hold. Hospitals and pharmacies are stocking up on medications to counter such an outbreak, and the most popular drug to treat flu is Tamiflu. Tamiflu was developed by Gilead Sciences (NASDAQ:GILD) and has been used to treat or prevent more than 50 million people worldwide since 1999. That estimate is more than two years old now, and is likely going to see a major boost with the threat of pandemic. Jim Cramer discussed Gilead Sciences as his favorite way to profit from the swine flu scare.
“So who do I think is the swine flu winner? Gilead, GILD. A biotech stock I’ve owned for a long time in my charitable trust. It gets 80% of its sales from its fabulous HIV franchise. But it also earns royalties on the sales of Tamiflu. Which swine flu has only been resistant to in rare cases. This one’s it.
Tamiflu royalties are reported on a one quarter lag, which means you can get into Gilead when it’s barely moved. Before swine flu hits its Tamiflu royalties are on a sliding scale. The more of the drug that gets sold, the higher the royalties. Through the first $200 million of sales, that’s 14% Gilead gets, it gets 22% of everything once Tamiflu sales break through the $400 million mark.
In 2007, Tamiflu made it up to 17% of Gilead’s operating product courtesy of avian flu. Last year it was just 5%. Given that this is another strong flu year with swine flu coming on strong and we’re stockpiling Tamiflu left and right, I really think it has the power to move the numbers and thus more of Gilead’s stock, which again has flat-lined. Here’s the bottom line, I don’t want you gambling on the president’s NFL-like healthcare strategy. It’s too hard. The line’s all figured out. He’s going for the field goal. Instead of the gambling on a field goal, invest in whatever has a chance of beating swine flu. Which means invest in Gilead.” — CNBC’s Mad Money 9/9/2009
As Cramer noted, this stock has the unique ability to potential provide explosive returns in the event of a swine flu epidemic, but Tamiflu is not all the company has going for it. On the contrary, Gilead gets a vast majority of its sales from its HIV treatments. Furthermore, even though this stock has a lot of potential tied to the leading treatment for the flu, it has not seen very much appreciation recently, only up 5.5% in the last six months. Some of the smaller, pure-plays on swine flu that are admittedly more speculative have seen much greater returns recently.
At Ockham, our methodology sees Gilead as Undervalued at its current price level. In fact, we would be pleased with the valuation even if there was not significant potential in the H1N1 scare. Over the past ten years, Gilead has traded in a price-to-cash earnings range of 24.3x to 40.3x, but currently the stock is trading well below this range at just 17.5x. Similarly, on a price-to-sales basis GILD is trading 41% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels. Perhaps, GILD stock has been held down by fear of new government regulation, but again this could be viewed as an opportunity rather than a hindrance. We think this stock is a justifiable buy right now, even if the swine flu hype does not materialize into a huge sales boost to Gilead.
No one wants to see the swine flu illness continue to worsen, but there is relatively little one can do to prevent such a thing. The costs of a significant outbreak would be tremendous. However, investors could seize an opportunity in the growing public awareness of such a problem.