No matter how tired we get of hearing about COVID-19, there is no denying that ever since the virus 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 worked nonstop to develop effective treatments for the disease. Available vaccines have been available for wide distribution to most age groups, and more recently have even been expanded to small children. 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 12.5% 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 earlier this year 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; analysts point to the expectation that remdesivir sales will decline as pandemic concerns fade.
While variants like delta and omicron prompted big spikes in infections, hospitalizations, and deaths in late 2021 and into this year, new, declining numbers have some wondering if we may, in fact be turning a corner to seeing coronavirus finally move to an endemic status. If so, those bearish forecasts about remdesivir and its continued utility and benefit may be correct.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 before the end of that year at around $86.
From that point, however, the company’s following earnings reports showed that, while the company has a generally 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 was 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 staged a sizable new bullish trend that peaked in mid-August at around $74 in late December. The stock’s momentum since then, however has turned strongly bearish since then, with the stock dropping rapidly from that peak to a new low point earlier this week at around $61.
A little more than half of that drop followed the company’s latest earnings report. Does the pace of that decline imply that the market is pricing fundamental problems into the stock’s price, or could it simply be a case where the market has discounted the stock further than it should given the company’s fundamental strength? Let’s see what we can find.
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 $77.6 billion.
Earnings and Sales Growth: Over the past year, earnings declined by about -68.5%, while sales dipped by -2.39%. In the last quarter, earnings were nearly -74% lower, while sales showed the same -2.39% decline. At the end of 2020, GILD’s operating profile dipped into negative territory, but stabilized and even showed solid signs of recovery into the end of the third quarter of 2021. That recovery may be in jeopardy, however; Net Income as a percentage of Revenues was 22.8% in the trailing twelve-month period and deteriorated in alarming fashion, to 5.27% in the last quarter.
Free Cash Flow: GILD’s Free Cash Flow is healthy, at about $10.8 billion. On a Free Cash Flow Yield basis, that translates to 13.88%. 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 six months ago, from $8.4 billion.
Debt to Equity: GILD has a debt/equity ratio of 1.22, 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 $7.8 billion in cash in the last quarter (down from $23.9 billion at the end of 2020) against roughly $25.1 billion in long-term debt. The company’s operating profile suggests there should be no problem servicing its debt, however if the present pattern of declining Net Income is not reversed, debt service will begin to eat into the company’s liquidity.
Dividend: GILD pays a dividend of $2.92 per share (up from $2.52 in 2019, $2.72 in 2020, and $2.84 last year), which translates to an annual yield of about 4.76% 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 $66 per share, which means that GILD is somewhat undervalued, with about 6% upside from its current price. It also puts a practical bargain price at around $53.
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 plunge from its late December high at around $74 to its recent low at around $61; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. Current support is at the recent pivot low at $61, with immediate resistance at around $63 based on pivot activity seen in March and May of 2021.
A drop below $61 could have additional downside to about $56 based on lows last seen at the beginning of 2021 and which are not shown on this chart. A push above $63 has about $2 of immediate upside to next resistance based on a pivot low in early November at that level, with additional, limited upside at around $66 where the 38.2% retracement line sits. This is also the minimum level the stock would need to break above to reverse the current downward trend and begin staging a legitimate new upward trend.
Near-term Keys: Given the limited upside given GILD’s current valuation, the stock doesn’t work as a useful value right now. I also find the drop in Net Income a big enough red flag to call a pause on any serious consideration of GILD as a useful, long-term buying opportunity until the most recent pattern changes.
That also means that the best probabilities in working with this stock lie in short-term trading strategies. You could use a break above $63 as a speculative opportunity to buy the stock or work with call options, with $65 to $66 offering practical profit targets on a short-term, bullish trade. A drop below $61 would be a strong signal to consider shorting the stock or buying put options, with $56 offering an attractive profit target level on a bearish trade.