That’s the case recently for biotech growth monster Gilead Sciences (NASDAQ: GILD).
Last year Gilead received FDA approval for their new hepatitis C that costs roughly $1,000 a day, perhaps $100,000 for a full course of treatment.
Ever since, Gilead’s stock price has been on a tear since the hepatitis C drug, Solvaldi, has been a huge success.
Fast forward to this past month when the company announced earnings and they were blowout numbers.
Of course, the stock sold off.
Here are the key numbers:
- Revenues grew 134% to $7,314 billion – remember, these are quarterly numbers
- Profits (net income) grew 338% to $3,462 billion
- Earnings per share grew 364% to 2.18 (GAA), non-GAAP $.25 or so higher)
- Gross Profit Margins were 90% (that is not a typo)
- Guidance for 2015 was for revenues of $26-$27 billion (in my opinion this is a lowball estimate)
The company also announced its first ever dividend, $.43 per quarter and a $15 billion share buyback (one tenth of their market cap) after the current $5 billion buyback is completed later this year.
The Stock Sold Off After Blockbuster Earnings
Why did this happen?
It seems to always happen with Gilead’s earnings report.
Wall Street did not like the forecast, which in turn is based on a belief by the company that the payers (private insurance companies and governments) have the capacity to pay for only 250,000 patients.
That is a very lowball estimate and once, well, if, tort lawyers become involved in any way, that number will move up very quickly.
The Harvoni/Sovaldi treatment can cost up to $100,000 a patient (before average discounts of 22%) and there is only so much cash lying around.
That said, these treatments are the first to work, are light years ahead of a new competitor from AbbVie, and over time the rationing of treatment by payers will end once someone dies or loses a liver because they were on a waiting list for a known cure.
Not lifelong treatment, cure.
Why am I right and Wall Street wrong?
Because of Gilead’s history and some other data to back it up.
The forward price/earnings multiple (P/E) for Gilead is 10.9 if revenues remain static for four quarters, which they will not. The forward P/E for the S&P 500 is approaching 17. That is a near 50% discount to the market.
With a new dividend and tripling of the stock buyback program, the stock automatically becomes 8.6% more attractive than the moment before the earnings announcement.
Obviously traders, looking for quick cash, are running away and ignoring this fundamental as well.
The company is still the leader by far in drugs to treat HIV, a multi-billion dollar product line and has several other products that sell more than a billion a year, including Compera for pulmonary hypertension.
How to invest?
Buy this stock and hold it for a long run.
The call options on GILD are very liquid and command rich premiums, meaning you could probably generate 1.5%-2.0% per cent a month in cash and income if you sold calls and the stock moved little or not at all.
Why not own a stock with 90% profit margins?
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