Gilead Sciences: The Bull, the Bear and the Fence-Sitter

By Brian Feroldi, Sean Williams, and George Budwell Markets Fool.com

Gilead Sciences (NASDAQ: GILD)has been a fascinating company to watch over the last few years. Revenue, profits, and stock price all soared after the biotech giant launched its hepatitis C cures Harvoni and Sovaldi a few years back. However, recent competitive launches have caused each of these figures tohead in reverse.

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We asked a team of our Foolishhealthcare contributors if they were bullish, bearish, or neutral on Gilead's stock. Below you'll find their response so you can draw your own conclusions.

Image source: Getty Images.

The bear: Gilead's path forward isn't entirely clear

George Budwell:Not long ago, I was solidly in the bull camp when it came to Gilead Sciences. This top biotech, after all, did revolutionize the treatment paradigms for both HIV and hepatitis C.Over the past year, though, I've dramatically changed my outlook toward this biotech. Here's why.

The overarching issue is that Gilead's hep C drugs were never going to have a particularly long growth period. And the company probably knew that heading into Sovaldi's initial launch all the way back in late 2013.

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After all, the all-important U.S. hep C market has been steadily shrinking over the past two decades due to the advent of better screening procedures during blood transfusions, coupled with the fact that this new generation of drugs are functional cures for most patients. Curative treatments for a dwindling target market is not a recipe for long-term commercial success.

Yet, Gilead's management has done arguably very little to get ahead of this slow-moving train, and the company is facing a steep drop-off in revenue as a direct result.

This perplexing situation is especially hard to understand when Gilead's cash position now exceeds a whopping $30 billion. Pfizer, after all, bought Medivation for less than half that amount roughly six months ago -- adding a blockbuster cancer drug to its portfolio in the process.

The long and short of it is that Gilead's decision to stand pat and hoard cash while the hep C market slowly evaporates doesn't come across as a particularly compelling strategy to create shareholder value -- in either the long or short term. So, until Gilead brings in some fresh sources of revenue, I'm perfectly content to watch this falling knife from the safety of the sidelines.

The bull: Ignore this cash cow at your own risk

Sean Williams: If you've been a shareholder in Gilead since the summer of 2015, you've seen the slow and painful bleed lower. The company has, in effect, become a victim of its own success. By introducing an oral effective cure for hepatitis C that worked without the need for IV interferon and (most of the time) ribavirin, Gilead captured the hepatitis C virus (HCV) market. Not surprisingly, it generated more than $20 billion in sales just from the sale of Harvoni and Sovaldi in 2015. This year, its forecast calls for just $7.5 billion to $9 billion in HCV sales.

But in spite of Wall Street's more tepid outlook on the company, I remain convinced that it can succeed and motor higher over the long run.

To begin with, even though Gilead Sciences hit the low-hanging fruit in the world's best pharmaceutical market (the U.S.), there are an estimated 180 million people worldwide with HCV, according to the World Health Organization. Even if Gilead generates lower margins in foreign countries, there's still a multiyear or multidecade HCV opportunity for the company.

Investors also shouldn't overlook its rapidly growing HIV product portfolio. Gilead recently had both of its next-generation, once-daily TAF-based regimens (Odefsey and Descovy) approved by the Food and Drug Administration. Both drugs are expected to easily top the $1 billion annual sales mark, if not hit $2 billion. They'll be a critical cog that should keep Gilead's HIV segment growing by a double-digit percentage for the immediate future. With no cure in sight for HIV, Gilead is expected to remain a very key player in this indication.

Gilead is also a cash cow. Even with a reduced forecast, its superior operating margin should allow it to generate north of $10 billion in free cash flow each year. This would allow the company to have more than $50 billion in cash and cash equivalents by the end of the decade. It's no secret that Gilead wants to complement its portfolio and pipeline with acquisitions, and this cash flow gives it the ability to do just that. Remember, the last major purchase Gilead made was Pharmasset, for $11 billion, and that only fueled its entire HCV product portfolio.

With Gilead valued at just nine times forward earnings, sporting a top-shelf HCV and HIV portfolio, and generating a boatload of cash, I don't see how this stock can go anywhere but up over the long run.

The fence-sitter: Too cheap to sell, but no growth in sight

Brian Feroldi: I've been a shareholder of Gilead Sciences for nearly two years. My bullishness for the shares stemmed from the company's long history of success, dominant position in HIV and HCV, and burgeoning pipeline of product candidates. When considering a cheap valuation, growing dividend, and monster buyback program, I felt good about the company's shot at outperforming.

Unfortunately, my purchases currently look like they were ill-timed. While Gilead continues to crank out cash flow and return gobs of it to shareholders, Wall Street has remained laser-focused on the company's falling HCV sales. Given that even management doesn't know when HCV sales are going to bottom, it is hard to believe that the markets are going to change their tune about Gilead's valuation any time soon.

Meanwhile, analysts have been mounting huge pressure on management to use its massive cash hoard to buy something. Thus far the company has remained committed to making an acquisition only if the science and valuation make sense. While I applaud Gilead's discipline, that's a hard combination to find in today's market.

At the same time, there's no doubt that Gilead's stock is currently dirt-cheap. Shares are trading for less than nine times forward earnings and the company's dividend yield has been pushed above 3%. While I'm not terribly bullish on Gilead's near-term results, I think that shares are far too cheap to consider selling today. That's why my personal plan is to simply hang on to the shares that I have and watch as the story continues to unfold from here.

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Brian Feroldi owns shares of Gilead Sciences. George Budwell owns shares of Pfizer. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short June 2017 $70 calls on Gilead Sciences. The Motley Fool has a disclosure policy.