Ever since coronavirus found its way to American shores, a lot of media attention has been given to the Healthcare sector – and especially to the Biotechnology industry, where many of the biggest names across the world have been working hard to develop effective treatments for the disease. As of this writing, vaccinations have steadily increased, and the population groups vaccinations are available for has expanded to include children ages 12 to 16 most recently. Besides vaccines, anti-viral treatments also saw a significant push in development along with big demand.
Some of the names that showed early promise also received the most attention from analysts and media types, at least in the earliest stages of the pandemic. One of those companies is Gilead Sciences Inc. (GILD), a large-cap company with treatments for diseases such as HIV/AIDS, cancer, and other respiratory diseases. One of their antiviral drugs, remdesivir was originally created to combat the hepatitis C virus, but that demonstrated a benefit in clinical trials with hospitalized COVID patients – enough to gain emergency approval from the FDA, and to give the company a revenue stream that in 2020 represented approximately 12% of sales. Outside of COVID-19, the company has also been investing heavily since 2019 to bolster its drug pipeline, with its acquisition of Immunomedics providing a newly approved treatment for metastatic triple-negative breast cancer that was approved by the FDA last month and is expected to generate $3.5 billion in sales by 2025. The caveat associated with remdesivir as a growth driver is that its long-term benefit is less clear; in the absence of useful vaccines and antivirals specifically created for COVID in 2020, physicians were forced to be creative, creating cocktails of existing drugs in an attempt to treat symptoms and to help patients get through the worst effects.
Some of the early news about remdesivir gave investors enough enthusiasm about GILD to push the stock from a February 2020 low around $62 to a peak a year ago at around $86. From that point, however, the company’s latest earnings reports have shown that, while the company has a healthy balance sheet, their capital expenditures – which certainly, and appropriately included a big push to fast-track remdesivir as a COVID treatment – put the company’s operating profile in net-negative territory. That has proven a strong enough concern to push the stock into a downward trend into the beginning of 2021 that saw it hit a trend low at around $56.50. From that low, the stock has staged a sizable push that saw it recently break above resistance at $68. Is the picture as bad as it looks, or could the stock’s fade offer a useful opportunity for long-term, value-based investors? Let’s take a look.
Fundamental and Value Profile
Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes medicines in areas of unmet medical need. The Company’s portfolio of products and pipeline of investigational drugs includes treatments for Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome (HIV/AIDS), liver diseases, cancer, inflammatory and respiratory diseases and cardiovascular conditions. Its products for HIV/AIDS patients include Descovy, Odefsey, Genvoya, Stribild, Complera/Eviplera, Truvada, Emtriva, Tybost and Vitekta. Its products for patients with liver diseases include Vemlidy, Epclusa, Harvoni, Sovaldi, Viread and Hepsera. It offers Zydelig to patients with hematology/oncology diseases. Its products for patients with various cardiovascular diseases include Letairis, Ranexa and Lexiscan. Its products for various inflammation/respiratory diseases include Cayston and Tamiflu. It had operations in more than 30 countries, as of December 31, 2016. GILD has a current market cap of $83.2 billion.
Earnings and Sales Growth: Over the past year, earnings increased almost 24%, while sales grew by 15.77%. In the last quarter, earnings were -5% lower, while sales declined by nearly -13.5%. At the end of 2020, GILD’s operating profile dipped into negative territory, but appears to have stabilized as of the most recent report; Net Income as a percentage of Revenues was 1.18% in the trailing twelve-month period and strengthened to 26.92% in the last quarter.
Free Cash Flow: GILD’s Free Cash Flow is generally healthy, at about $8.7 billion. On a Free Cash Flow Yield basis, that translates to 10.43%. It should be noted that this number has declined steadily since the beginning of 2016, when Free Cash Flow peaked at $19.5 billion, but has also improved from late 2019, when Free Cash Flow was about $6.6 billion. It is also sizably higher versus the last quarter from $7.5 billion.
Debt to Equity: GILD has a debt/equity ratio of 1.55, which is a bit higher than I prefer to see, and also reflects increasing debt the company has taken on, in part to complete its acquisition of Immunomedics; but by itself this number doesn’t really tell the whole story. Their balance sheet shows $5.66 billion in cash in the last quarter (down from $7.5 billion the last quarter, and $23.9 billion in the quarter before that) against $29 billion in long-term debt. The company’s operating profile suggests there should be no problem servicing debt payments, but the large decline in cash while debt is increasing is a red flag that bears watching for improvement in the quarters ahead.
Dividend: GILD pays a dividend of $2.84 per share (up from $2.52 in 2019 and $2.72 last year), which translates to an annual yield of about 4.28% at the stock’s current price. Management’s ability to increase the dividend is a positive sign.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $60 per share, which means that GILD is overvalued, with about -10% downside from its current price, and also puts the stock’s bargain price at around $48.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: the chart above covers the last year of price activity for GILD. The diagonal red line traces the stock’s downward trend from its May 2020 high at around $86 to its December low at around $56.50; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. GILD rebounded from that low to push above the 38.2% retracement line at around $68. Current support should lie at around $8 based on on that resistance break, with next support in the $65 range. Immediate resistance should be at around $72, based on pivot lows in May and June of last year and a little above the 50% retracement line, with additional upside to about $75 around the 61.8% retracement line if bullish momentum increases.
Near-term Keys: Given GILD’s overvalued status, it’s hard to get too excited about seeing the stock trading at a steep discount relative to its 2020 highs. The company would need to post measurable improvements in Free Cash Flow, with continued improvement in Net Income in the quarters ahead to begin to shift the fundamental view of this company in a more favorable light. That also means that the best probabilities lie with short-term trades. The stock’s recent break above resistance could be taken as a signal to consider consider buying the stock or working with call options, using $72 as practical, bullish profit target; a drop below $68 could provide a signal to think about shorting the stock, using $65 as a useful target on a bearish short-term trade.