Value investors pile into Gilead expecting strong long-term growth: report

As it gets ready to announce earnings after the market closes today, Gilead is trading on Wall Street at less than seven times what analysts estimate it will earn over the next year—a valuation that’s more like an automaker than a cutting-edge pharma company. That’s great news for folks like David Katz, chief investment officer at Matrix Asset Advisors, a value investor.

"Once the market’s mindset changes from 'this company is in a secular decline' to 'this company has a very strong earnings base and good long-term earnings possibility,' that it’s easy to go from six-and-a-half times earnings to 9 times earnings," Katz told Reuters. "And if you do that, you’re talking about a vastly higher stock price." Expecting just that scenario, Matrix has been building its stake in the California drugmaker, he added.

How Gilead found itself in slow-growth mode is a tale of both game-changing innovation and inflated expectations. Its hepatitis C blockbusters Sovaldi and Harvoni completely altered the prognosis for patients with the disease—curing most of them, and in so doing, greatly shrinking the market of patients in need of treatments. At the same time, competition and discounting by insurance companies took a slice out of the company’s potential revenue haul.

The troubles showed in Gilead’s third-quarter results. Sales of Sovaldi and Harvoni plummeted 31%, despite the entry of the company’s new hepatitis C treatment, Epclusa. Analysts on average expect Gilead’s earnings to drop 7% this year and 4% next year, according to data collected by Thomson Reuters. The company’s shares, trading at just over $72, have fallen 40% in the last year-and-a-half.

So what are the most likely sources of growth for Gilead going forward? It won yet another hepatitis approval in November, this time for Vemlidy to treat the B strain of the disease. But the company is likely to reap much bigger sales over the long term in the hot market for drugs to treat nonalcoholic liver disease (NASH). It struck a $1.2 billion licensing deal last year with Nimbus, which is developing a NASH drug.

There could be more deals on the way. During the third quarter earnings call, Gilead CEO John Milligan told investors the company is “very, very active” in the dealmaking arena, though careful to make sure all acquisitions and licensing transactions “make sense.” Gilead’s shrinking market cap has fueled some wild megadeal speculation on Wall Street, including rumors that Allergan might jump in and make a bid on the struggling hep C pioneer. That tie-up would certainly make sense in light of Allergan’s September acquisitions of Tobira and Akarna, both of which are developing NASH treatments.

For now, though, investors will be looking for signs of hope in Gilead’s fourth-quarter earnings report. Jason Kolbert, who manages healthcare research at Maxim Group, predicts that most investors will remain focused on Gilead’s falling growth rate. Still, he tells Reuters, he believes the fundamentals of the company for those in search of value “are great.”