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The past two years have been a nightmare for Gilead Sciences (NASDAQ: GILD) and its shareholders. After Gilead shares reached a high of $123 in June 2015, the stock has gradually declined ever since.
Gilead shares recently dipped below $70 per share. The steady fall has been due to investor fears over the company’s core Hepatitis drugs facing increasing competition and regulatory pressure.
While Gilead’s sales and earnings have deteriorated, the company is still highly profitable. And, it has a huge amount of cash on the balance sheet that it can use to replenish its product pipeline.
With a dirt-cheap valuation and a 3% dividend yield, Gilead stock may have finally hit bottom.
New Therapies Provide a Boost
At the heart of Gilead’s woes is its flagship HCV portfolio, which includes its flagship Hepatitis C treatments Harvoni and Sovaldi. Led by these two medications, Gilead’s HCV products represent nearly half the company’s total revenue.
This is a big problem for Gilead. As a biotech company, it is vulnerable to competition. Its fate rests in the success of new drugs.
Moreover, in an era of increasing political and public furor over drug prices, Gilead has been severely pressured.
Sales of Gilead’s HCV products declined 23% in 2016. Overall, Gilead’s earnings per share declined 16% for the year.
Fortunately, Gilead is taking action. It has aggressively invested in research and development—including $5 billion of R&D last year—to develop new products in HCV, as well as emerging therapies like HIV and oncology.
The company also has a growing portfolio of therapies for HIV, which helped HIV product sales increase 17% in 2016. HIV now represents more than 40% of the company’s annual sales.
Lastly, Gilead has a high-growth inflammation and respiratory portfolio. This is also helping protect against declines from its core HCV products. For example, product sales outside HCV and HIV/AIDS increased 14% last year.
Potential Catalysts
Gilead’s valuation has compressed to a miniscule level, as the fear has escalated. Right now, shares trade for a dirt-cheap P/E ratio of 7.
As Gilead’s HCV business recovers and it sees growth in new therapies, investors could become more comfortable with the company’s growth trajectory.
Gilead remains a highly profitable company. Even last year, which was marred by severe price deflation, the company still earned $9.94 per share.
And, the company is in strong enough financial position that it could turn to a sizable acquisition, if it feels its internal R&D is not working quickly enough.
Gilead ended 2016 with $32 billion of cash, investments, and marketable securities on its balance sheet. Its cash hoard could be put to work to acquire a company in a targeted field, to boost its pipeline even further.
With a P/E ratio of 7 and a falling share price, Gilead’s dividend yield has elevated. It also recently increased its dividend by 10%, the second year in a row of at least a 9% dividend increase.
The end result is that Gilead stock now yields 3%, which is significantly above the average dividend yield in the S&P 500.
The falling share price over the past two years has presented a unique opportunity. Gilead shares now look very attractive for value and income investors, which is extremely rare for a biotech stock.
Disclosure: The author is personally long GILD.