Gilead Sciences Strength is Underestimated

Most seem to be valuing Gilead Sciences (GILD) stock solely based on fears over competition over its Hepatitis C drugs Harvoni and Sovaldi.  Gilead has been forced to cut prices and therefore profits to compete with the new drug offers which are generally inferior to Harvoni.  In fact after a year it has been proven that Abbvie has not been able to take significant market share.  Now that Merck has entered the market it looks like they are hurting Abbvie, but the future is likely to show Gilead will remain largely untouched in terms of total scrips, even though prices will be lower.

Merck will soon learn the same lesson that Abbvie learned, that cutting prices is futile.  Therefore, they won't cut prices further.  They need to pay back R&D somehow, while Gilead has already made billions, so can go as low or lower than any competition.  Therefore after taking what appears to be a 15% price cut this quarter, it is likely further cuts are not in store so Harvoni/Sovaldi revenue should grow some from here.

But more importantly most are ignoring the other half of Gilead revenue, which has been growing at almost 38%/year.  Not to mention Gilead's large cash pile and great cash flow that allows them to make any acquisition they'd like.  But let's focus on the details of the non Harvoni/Sovaldi revenue. 

The data clearly shows non Harvoni/Sovaldi sales growing at a rapid pace.  But more importantly for the near future there is a clear pattern of weak Q1 sales growth and even QoQ contraction in Q1 2015 and 2016.  After the latest report this contraction has been interpreted as the beginning of the end caused by lower Harvoni/Sovaldi sales prices.  But what is coming in the next quarters is huge sales gains that appear to be completely unexpected by most analysts who seem to be projecting declining sales forever.

It appears to me the recent dip to about $90 has created a strong buy opportunity.  GILD is carrying a PE of about 7, pays a 2.4% dividend that has been raised twice since the dividend was initiated just over a year ago.  While the company has also approved buying back another $12B in stock or about 10% of float at current prices.

With the right acquisition this stock will explode as bringing the multiple up to sector norms would double the price.  I'm also going to go out on a limb and predict that Gilead blows out revenue and earnings the remainder of the year.  Gilead projects $30-$31B in sales, and many analysts have lowered there estimates.  It looks to me like Gilead will be in the $33-$35B range.