Gilead Sciences: Groundbreaking Value

Gilead Sciences (GILD) has been a serial disappointer among the biotechnology sector, as pipeline concerns have dragged the stock down by 31% over the last twelve months compared to a 13.6% gain in the S&P 500.  Gilead has attempted to support their stock by announcing $1 billion worth of stock buyback authorization through January 2011 (Gilead Sciences Announces a Large Buyback), and they are surely snapping up shares at this lowest price in years.  Nothing has seemed to work for GILD stock and coming into the day the stock was trading for under 9x this year’s earnings!  Today, the concerns over its pipeline take a back seat to an exciting development for Gilead and the stock has risen about 3% in response.

A drug known as Tenofovir, developed by Gilead, has shown significant efficacy in reducing the risk of contracting HIV says a study of more than 900 women in South Africa (Financial Times).  This microbicidal gel treatment is the first such treatment to have shown to be effective.  The market’s muted reaction to the success of the so-called Caprisa study is reasonable, as the drug will of course still need further study and regulatory approval before it can be approved for sale.  However, in our view, this is a positive development that speaks to some of the promising projects which Gilead hopes will support their pipeline.  Nearly three-quarters of their revenue comes from antivirals Atripla and Truvada, but those drugs face increased competition from generics as they lose patent protection down the road.

GILD is the obvious market leader in AIDS treatments and they will not lose patent protection for still a few years.  So much concern swirls around the pipeline or lack of promising blockbusters there to replace Atripla and Truvada, but there is still time to discover them yet.  Of course, Tenofovir is just one drug that GILD is currently developing and the company already has a good number of drugs already in production and gaining share as they look to expand beyond their strong HIV franchises.  For example, the company has a partnership with Roche for the popular influenza drug, Tamiflu.  Furthermore, the company has a heap of cash and generates tremendous cash flow that it has the ability to be a buyer of some of its smaller rivals with strong prospects.  We like to think of Gilead’s exceptionally strong balance sheet as a tool that will allow them to maneuver and pursue growth.

At Ockham, it is no secret that we think the current valuation of GILD is too cheap and thus we have our most bullish Greatly Undervalued stance on the shares.  The stock trades well below the historically normal multiples of cash earnings and sales per shares because of the concerns over their dependence on those two key drugs.  Of course, we share concerns about so much of the company’s revenue coming from its HIV drugs, but we do expect those drugs to be strong for another few years (at least) until they have found their next big thing.  At this point, we think the stock has effectively priced in a lot of bad news, and any further positive developments about Tenofovir or another drug outside of the AIDS treatments could easily send this stock higher to a more normal valuation.  Value investors often seek stocks that have fallen out of favor with the market, yet continue to have a strong fundamental underpinning; Gilead is just such a stock.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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