A Brief Idea of Gilead Science
This company is famous for the R&D of hepatitis, oncology and HIV drugs in the market. As you can tell, there isn’t a cure for these diseases and what these companies are trying to achieve is to find a breakthrough for drugs to treat those diseases. But until then slow efforts are in the making to lower the destructive force that associated with those diseases. This proves that companies like these are subjected to steep growth if something valuable would to materialize.
That is the reason that attracted me to invest in pharmaceutical as the risk reward ratio presumably falls on the better side assuming moral hazard related issues were avoided.
What Initiated The Buy?
Gilead Sciences had been a targeted stock for quite a while and I’m pretty eager to add it as part of our fund since its growth potentials are really promising. But the price had been declining since my interest started in the beginning. As a matter of fact, last year the price didn’t actually correct to the upside making any point of entry being associated to ‘catching a falling knife’.
That being the case, a clear technical indicator comes in to good use for minimizing the error of entry into a stock that is constant falling to no floor. Stock price begin to show strength prior to the Q2 2017 earnings release and I’ve decided to take position then.
We just can’t by into any pharmaceutical. Most big pharma companies are trading at price to earnings estimate at double digits. Gilead however is trading below 10 which doesn’t mean that the growth is much slower but there are some other reasons to that:
- Too much cash in the bank and shareholders are urging the management to buy smaller pharmaceutical companies
This phenomenon had gone over a year and they still haven’t found the right candidate for acquisition. The market had already paid a discount in terms of price to earnings expecting Gilead to do an acquisition. It is common for the market value of the acquirer to decline since the market acknowledge that the buyer always buys expensive than what the market perceives.
(see latest acquisition update below)
- It has been a while since new drugs by Gilead enter the market
With the most recent drug approved by the FDA, we shall see more approvals on its way. (see pipelines in the next section).
- Biggest revenue contributor Sovaldi recently faces cheaper drug competition
The stock price declined of about 40% seemed to have factor in this issue with lower performing drugs. The good thing is that drug quantity sold increases to match the lowered price. This stabilized the revenue for now until new products are approved in the future.
Pipeline shows the progression for each drug in the company’s drug portfolio. Phase 1, Phase 2 and Phase 3 differs with test runs on the amount of people. Phase 1 could run on just small group of 10 – 20 but Phase 3 goes up to the thousands.
Drugs might get stuck in Phase 3 for quite a while as the population increases, the variability extends and the occurrence of unwanted side effect presents itself. But after Phase 3, drugs get submitted to the FDA for approval and it doesn’t take long until it hits the market.
Compared to a year ago, Gilead’s pipeline had more and more drugs in the Phase 3 stage. This is a positive sign in the near future where once it gets submitted we see more than 90% success rate that the new drug gets approval. This is when the revenue and earnings start pouring in once again.
The company’s pipeline can be view in the link below.
Most analyst had placed an overdone and there are just as many ‘Buy’ calls when the stock was trading at $90 versus our buying point of $70. This made it certain that it’s just a matter of time before things start to move again when the business stabilized.
I seriously do not think that if an acquisition would to take place in the near future, the price adjustment to GILD would not be huge. As every quarter passes with retained earnings pouring in, it just meant that the cash balance of this company would continue to climb.
As of now, the company has $8 billion (management stated $36 billion of cash, cash equivalents and securities) worth of cash holding as compared to a year ago at only $6 billion but the biggest problem is finding the right thing to buy. That would lag the stock movement since sitting cash isn’t making shareholders richer compared to invested cash with positive returns.
28 Aug 2017 – Gilead finally decided to make their first purchase in years buying Kite Pharmaceutical for $12 B. The stock price reaction seems to be expected where the acquirer actually increase in value rather than falling.
Guess this ends the chapter for continuous price decline for the stock awaiting acquisition. It is back to normal price movement now…