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Is Gilead Sciences, Inc. (GILD) a Buy?

Keith Speights, The Motley Fool

Gilead Sciences (NASDAQ: GILD) once was a favorite for biotech investors. That hasn't been the case over the past couple of years, though. The big biotech fell out of favor with investors as sales for its hepatitis C virus (HCV) drugs plunged, dragging Gilead's overall revenue and earnings down in the process.

For the first time in a while, though, Gilead's future could look bright. Is the biotech stock yet again a buy? There are three key reasons to think it is.

Red question mark on top of scattered pile of $100 bills

Image source: Getty Images.

1. Solid long-term growth prospects

The Beatles sang in the 60s that "All You Need Is Love," but for stocks, all you need is growth. After a hard few years, Gilead finally appears to be on the cusp of returning to growth.

One key for the company is that the trajectory of its HCV franchise sales decline should level off. Gilead CEO John Milligan reiterated in the biotech's Q4 earnings call in February that "the market dynamics in HCV are stabilizing." It should now come down to a head-to-head battle between AbbVie and Gilead in HCV. Gilead expects to see stable market share by the middle of 2018.

If the company is right, that sets Gilead up for overall revenue and earnings growth, with its HIV franchise leading the way. Gilead launched its newest HIV drug, Biktarvy, in the first quarter. Market research firm EvaluatePharma projects that Biktarvy will be the biggest new drug launch of 2018 and generate revenue of more than $5 billion by 2022.

Gilead also now has a promising cancer drug in its lineup, thanks to the acquisition last year of Kite Pharma. Yescarta became the second CAR-T (chimeric antigen receptor T cell) therapy to win FDA approval in October. Analysts think Yescarta could reach peak annual sales in the ballpark of $2.7 billion.

Look to Gilead's pipeline for even more growth. The biotech stands a good chance of becoming a leader in treating non-alcoholic steatohepatitis (NASH), a liver disease for which there currently is no approved drug. Gilead's selonsertib is in a late-stage clinical study targeting NASH, and the company has two other NASH candidates in phase 2 development. The biotech could also file for regulatory approval later this year for another potential winner, autoimmune disease drug filgotinib.  

2. Strong dividend

While Gilead's HCV sales stabilize and its other products step up to drive growth, investors will get paid to wait. The company pays a strong dividend, which currently yields more than 3%.

Gilead hasn't been in the dividend club for long, initiating its dividend program in 2015. However, once the biotech got started, it didn't slow down. Over the last three years, Gilead has increased its dividend payout by nearly 33%.

Keeping the dividends flowing shouldn't be a problem. Gilead uses only 24% of its free cash flow to fund the dividend program. Even if its free cash flow slips some as HCV revenue declines, Gilead should be in great shape to continue paying -- and hiking -- its dividend. 

3. Bargain-bin valuation

Gilead stock trades at a little more than 11 times expected earnings. That's a bargain-bin valuation, resulting, of course, from the company's HCV woes of the past few years.

I don't think the market is pricing in Gilead's pipeline potential. And it doesn't appear to be pricing in the possibility that HCV sales stabilize in the near future, either. 

In addition, Gilead's valuation looks even better when you consider its cash stockpile. The company reported $36.7 billion in cash, cash equivalents, and marketable securities at the end of 2017. That amount represents around 37% of Gilead's current market cap.

A few caveats

Is Gilead Sciences a buy? My answer is a resounding "yes." However, there are a few caveats.

Drug development is an inherently risky business. Pipeline setbacks for AbbVie and Celgene over the last few months are good examples of this. If filgotinib or selonsertib fail in their late-stage clinical studies, Gilead won't look like nearly as good of a bargain.

Also, if HCV sales don't stabilize this year, as Gilead's executives expect, a return to growth for the biotech will be postponed. The challenge for both Gilead and AbbVie is that it's hard to predict how many patients will start treatment. Gilead's timeline could be overly optimistic.

On the other hand, there's another wild card that could provide a boost for Gilead. The company hasn't been shy about its intention to make more acquisitions in the future. I liked the buyout of Kite, because it immediately positioned Gilead as a leader in CAR-T. Should Gilead make another strategic acquisition or two, investors could see the company's growth prospects in a different light.

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Keith Speights owns shares of AbbVie, Celgene, and Gilead Sciences. The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. The Motley Fool has the following options: short May 2018 $85 calls on Gilead Sciences. The Motley Fool has a disclosure policy.