Still long on Gilead (GILD): $120 PT

Price target: $120 Time frame: 1-2 years

A year after my original call (http://, I am still long GILD. The positive drivers clearly outweigh the overblown fears.

Positive Drivers:

  • the recent Kite Pharma acquisition
  • Gilead will continue to print money with non-alcoholic steatohepatitis (NASH) drugs

Overblown Fears:

  • “the hepatitis C (HCV) revenues are decreasing!”
  • “the HCV patents are expiring!”

The overblown fears should be non-issues.

Gilead continues to print money

Gilead has been growing rapidly the last few years, most recently generating 46% increase in free cash flow year over year in 2015 and 284% increase in 2014. Gilead generates an operating cash flow of nearly $20 billion per year, representing 55% of revenues. Compare that to a pharmaceutical industry average of 24%.

The recent acquisition of Kite Pharma will allow for strategic entry into the CAR-T space, opening up a new set of cash cows.

Gilead poised to be a leader in NASH therapeutics

A large number of these are going after non-alcoholic steatohepatosis (NASH), a highly prevalent liver condition linked to obesity with no approved treatment regimen that affects over 3 million people in the USA. With obesity rates rising exponentially (projected to hit 50% of all Americans by 2030), the NASH pipeline could generate tremendous value.

The risk-reward profile is more promising than ever

Modeling a base case with a discounted cash flow analysis, where we assume that Gilead is able to keep its 2H2015 prescription numbers for HCV and HIV until 2020, followed by yearly declines due to patent expirations and rising completion, the value per share of Gilead stock is $120. If we model a bull case, where we assume that prescription numbers continue to rise and reach peak levels at 2020, with minimal compromise of market share from competitors, we could see the share price could push $200 a share. If we model a bear case, where we assume that prescription numbers start declining now and lead to a 0 revenues for the HCV and HIV lines after 2022, Gilead would be worth $65/share. The bear case seems highly unlikely given superior efficacy of Sovaldi and Harvoni compared to its competitors. Keep in mind that these stock prices are conservative in that they don’t account for the potentially high revenue streams from the NASH pipeline as well as other therapeutic areas. With an upside of 40% in the base case and 132% in the bull case, and a limited potential downside of 25% in the bear case, Gilead is a great buy. Those investors who are willing to challenge the consensus will be deeply rewarded over the long term.

Bottom Line:

Gilead has been and will continue to be a well executed pharmaceutical company dedicated to introducing therapies for deadly diseases to the world.