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How Gilead Sciences Can Deliver A Double

This article is more than 9 years old.

Gilead Sciences’ (NASDAQ:GILD) drug portfolio has 16 medications, and generates gross margins over 70% with net margins consistently over 30%. It’s newest drug, Sovaldi, is dramatically boosting revenues and earnings, and two of our Masters, Eugene Groysman and Mike Koza, have noticed. This week I talked to Eugene to find out why he thinks GILD, which is up 49% in the last year, can double from here.

Eugene has a 12-year track record with Marketocracy with his average annual return of 18.3%. You can view Eugene‘s top five holdings, learn more about his strategy, and track his progress with monthly Performance Insights emailed directly to you at the end of each month by visiting our website.

Gilead Sciences’ is one of Eugene’s top 5 holdings.

Ken Kam:  Eugene, do you think Gilead has the potential to double in the next few years.

Eugene Groysman:  Yes, Gilead has a diverse drug portfolio. Sovaldi has shown tremendous success against Hepatitis-C.  This is good for Gilead’s bottom line.  According the Health and Human Services Department, there are 3.2 million Americans who have Hep-C. The Lancet estimates 9 million Europeans also have the virus, with only half that have been diagnosed.  There is a tremendous potential market for the drug.

Ken Kam:  Sovaldi was just introduced.  How are sales going?

Eugene Groysman:  Last year’s Q1, revenues from product sales were around $2.4 billion. This most recent quarter, product sales were $4.8 billion. Product sales more than doubled, and 46% of those sales came from Sovaldi. Normally, I don’t like to compare quarters, because I prefer to compare year over year, but it is certainly a good start.

Ken Kam: Where is the potential market growth going to come from?

Eugene Groysman:  First of the all the drug works. That is why Gilead can charge $84,000 for a 12 week course of treatment. So far this year, there has only been a little over 32,000 prescriptions issued. There are still a lot of people who have Hep-C in the U.S. who may benefit from this drug. In addition, Sovaldi was just approved in Europe. Gilead only sold $163 million of Sovaldi in Europe last quarter, yet there are more Hep-C patients in Europe than in the U.S., so European sales should surpass U.S. sales.  The World Health Organization estimates that at least 130 million people worldwide have Hepatitis-C.  That is a huge potential market, and Gilead is positioning itself to be the main player in that market.  With only $12 million in sales outside the U.S. and Europe, there is plenty of opportunity to grow international sales.

Ken Kam:  Using some of your favorite metrics, what do you like about Gilead now that Sovaldi is part of their drug portfolio?

Eugene Groysman:  As you know, I like cash flow from operations.  I especially like to use Cash Flow/Revenue as a ratio to make sure that the revenues and cash are growing at the same rate.  Gilead’s Cash Flow/Revenue was 0.27 in 2013.  Since the introduction of Sovaldi, the company already added $1.57 billion in cash from operations.  They now have over $4 billion in cash, and their Cash/Revenue is now 0.29.  That means their cash flow is growing faster than their revenues.

Ken Kam:  I see that Gilead is your fifth largest holding. Do you see it staying at that level?

Eugene Groysman:  I anticipate keeping it at 6% of the portfolio.  If it approaches 6.5%, I might reduce; I will definitely pare down the position if is 7% of my portfolio.  I don’t want to overexpose the rest of the portfolio if it becomes overweighted, and I don’t mind taking some profits.

Ken Kam:  Thanks Eugene. This looks promising.

My Take

I think Eugene makes a pretty strong case that Gilead’s sales can double in the next few years, and I think that with these kinds of margins, the stock price could double as well. GILD, however, is a volatile stock. The stock fell roughly 20% in the biotech selloff this past March. Most people find it hard to buy a stock after its suffered a big loss, but if you've done your homework, it is precisely at those times that you can get the best entry points. It is a fact of life that even if you are right about the company, the stock could still fall 20% because of factors outside of the company’s control.  I've seen Eugene trade both Apple (NASDAQ:AAPL)  and Tesla (NASDAQ:TSLA) to capture gains from these kind of price swings and it accounts for a good portion of his overall gains. Eugene believes that a properly allocated portfolio can perform better in any market than one in which the manager is only focused on picking the next best stock. He advocates that the positions should be acting for the greater good of the overall portfolio rather than acting independently of each other.

GILD by itself is too volatile to be considered a core holding. But when it is 6% of a portfolio of stocks in other industries that have the same growth potential, it can be a sound addition to a core portfolio.

Connect with Ken Kam on LinkedIN.

Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.