Gilead Sciences (GILD) is a good bio-technology companies with their strong franchise in HIV, a growing franchise in Hepatitis and potential in cardio-vascular therapies. Many think of Gilead as the provider of Tamiflu, a therapy for influenza. However, Tamiflu is a small part of the story and it has limited impact on the company’s prospects.
The strength of the company lies with its antiviral franchise, which experienced sales increase of 26 percent to $1.41 billion in the second quarter of 2009 due primarily to Truvada, which grew 18 percent and Atripla, which saw 60 percent sales increase. Tamiflu, sold through a partnership with Hoffmann-La Roche Ltd (Roche) provided royalties of $51.9 million in the second quarter of 2009. Europe is generating the best growth for Gilead’s HIV products.
While the company’s antiviral segment will continue to dominate the growth picture for the next year or more, Gilead has the potential to see new growth from its Liver Disease and Cardiovascular products that are just now coming onto the market. It is too early to tell if these products will achieve billion dollar status, though the eerily signs are positive. In countries where their liver disease products have been approved for use, they have achieved 13 percent market share. Management is now ramping up their product sales to help these products achieve even greater success. Since Hepatitis affects many people, the prospects for Gilead’s liver disease products have good potential to become important contributors to the growth of the company’s sales.
More recently, Gilead has become an important participant in the cardiovascular disease segment. Through acquisitions, most recently CV Therapeutics, Gilead now is becoming a participant in the cardiovascular disease segment. The potential for this segment is up in the air as it is to early to make and reasonable forecast on the potential sales that will stem from this segment.
After the second quarter of 2009 Gilead delivered a return on capital (EBIT/(Net working capital +Net Fixed Assets)) of 105%, an earnings yield (EBIT/(Enterprise value minus excess cash) of 5.6%, free cash flow margin of 51%, a free cash flow yield of 5.4%, and an enterprise value to free cash flow ratio of 18.2.
As a result, Gilead does an excellent job generating returns on their capital as indicated by the high return on capital. On the other hand, the higher value the market places on Gilead's stock holds down the earnings yield.
Gilead produces a substantial level of free cash from their sales as indicated by their high free cash flow margin. Again, the value the market places on Gilead's stock depresses the free cash flow yield.
Most people consider Gilead to be a growth company though their PE ratio is 19. I prefer the enterprise value to free cash flow ratio as a better indicator of the company’s ability to generate cash based on its valuation by the market. Their revenue growth that is greater than 25%, indicating Gilead may be undervalued for its growth potential and its ability to generate excess cash. Many analysts look for the PE ratio to be no more than two times their revenue growth rate, which is the case for Gilead (25*2=50). Gilead's PE ratio is less than the growth rate of their revenues, a positive indication that there is upside to the share price as long as revenue growth can maintain its current level.
In the interest of full disclosure, I have a position in Gilead Sciences, which I expect to keep.
