In a turbulent year for Gilead Sciences (NASDAQ:GILD), the company recently generated headlines that will hopefully turn things around for GILD stock. Over the weekend, insider information pegged Roche Holdings (OTCMKTS:RHHBY) executive Daniel O’Day as its new CEO.
O’Day is no stranger to the industry, having served as Roche Pharmaceuticals’ chief executive since June 3, 2016. Prior to that, he was the COO of the organization, a position he assumed on Sept. 1, 2012. Overall, O’Day levers nearly 30 years of operating experience at Roche.
Of course, the bigger question is how much a changing of the guard will impact Gilead Sciences stock. Year-to-date, shares have disappointed investors, returning a loss exceeding 3%. Only briefly did it manage to provide optimism, with GILD experiencing a surge in January and in the early summer.
Most of the time, though, GILD stock has been a choppy mess. And according to Bloomberg’s Joe Nocera, the reason why comes down to business sense. Gilead has emphasized more sciences than profitability.
Is GILD Stock Turning Soft?
In 2014, Gilead Sciences achieved a groundbreaking success with its Hepatitis C drug, Sovaldi. Unlike every other treatment offered previously, Sovaldi actually cured the liver disease that possibly affects nearly 150 million people worldwide. But for Gilead Sciences stock, the rewards were less than stellar.
Over the trailing five-year period, GILD stock has declined nearly 5%. While the company currently offers a dividend yield of 3.4%, that alone hasn’t attracted new buyers. The issue, Nocera asserts, is two-fold: first, no money in the cure exists, and second, the healthcare industry incentivizes flawed thinking.
Unless you’re completely naïve, you don’t need much explanation for the first point. For good measure, Nocera mentioned Jonas Salk’s discovery of the polio vaccine. The scientific breakthrough made him a giant in the scientific community, but not necessarily in the financial department.
The second point is a little more obscure. Prior to GILD releasing Sovaldi, management knew that rival AbbVie (NYSE:ABBV) was about to release its own Hepatitis C drug. As a result, Gilead’s leadership decided to dramatically increase Sovaldi’s price tag to capitalize on its breakthrough.
However, GILD stock suffered a sharp decline after an initial pop in the share price. Patients expressed outrage at the price gouging. Even worse, the move attracted a Senate investigation.
But perhaps the most-insulting indignity was Wall Street’s response. In the trailing five years, ABBV has gained 66%. This despite the fact that AbbVie’s Hepatitis C drug was ineffective.
The message is cynical but crystal clear: If you’re a pharmaceutical firm, don’t cure diseases, but instead, manage them. In this manner, you can achieve consistent revenue streams a la Big Tobacco companies. GILD went the other way, which apparently doomed Gilead Sciences stock.
Don’t Give Up on Gilead Sciences Stock
In my opinion, Bloomberg’s tone implies that Gilead’s management team made a strategic mistake. After all, the pharmaceutical firm can no longer rely on lucrative revenues once a patient is healed. Moreover, it must further eat some costs when it markets drugs like Sovaldi to lower-income markets. It’s great for philanthropy but not so much for GILD stock.
Let me just say, though, that I’m grateful we’re having this discussion. Previously, if I had blasted the pharmaceutical business model, I end up looking like an Alex Jones listener. Now, I can quote Bloomberg, so good luck trying to put my name on the NSA watch list.
But more pertinently for Gilead Sciences stock, I think the underlying company is a pioneer. We just need to give them some time for the markets to catch up.
First, finding a cure isn’t necessarily profit-prohibitive. As I previously mentioned, Sovaldi isn’t cheap. But because it was so effective, health insurance companies ponied up the costs. Since insurance providers are in the business to accept premiums, but not to pay out, they must justify their actions. That Gilead managed to overcome this steep barrier speaks volumes of their scientific rigor.
Second, refusing to find a cure isn’t necessarily a panacea. As a prime example, the sector exchange-traded fund VanEck Vectors Pharmaceutical ETF (NASDAQ:PPH) is up only 16% over the last five years. It’s positive but hardly worth any excitement.
GILD Stock Offers Tremendous Value
Finally, I think comparing GILD stock to AbbVie fails to tell the whole picture. ABBV gained momentum off its Humira drug, which primarily treats rheumatoid arthritis and Crohn’s disease. Without taking anything away from sufferers, these are manageable health issues.
A failing liver, though, is not. If you suffer from Hepatitis C, your only viable option outside of a liver transplant is Gilead’s Sovaldi. But if you suffer from arthritis, you have several treatment options. After all, mediocrity is contagious.
Therefore, I’d treat GILD stock as an undervalued opportunity. To me, it’s obvious that poor but somewhat unfair PR derailed shares. But the long-term outcome for finding cures instead of the treatment merry-go-round should pay off handsomely.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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