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Gilead Sciences, Inc. (GILD) Stock Is Primed After Kite Pharma Buy

Markets barely reacted when Gilead Sciences Inc. (NASDAQ:GILD) announced on Sept. 14 that it would buy Kite Pharma, Inc. for $11.9 billion. The lack of a reaction is understandable: Kite may not bring it the growth that it needs. But Gilead’s HCV business is slowing, so management must put its excess cash to good use. Kite could be the company that re-accelerates growth.

Gilead Sciences (GILD)
Gilead Sciences (GILD)

Source: Gilead Sciences

The slowdown in Gilead’s HCV business is starting to come to an end. Revenues are leveling off but profits are holding strong. This gives GILD stock an undervaluation of 9 times and a forward P/E of 11.2 times.

The HCV segment will continue adding meaningfully to Gilead’s cash flow, which is money it needs to fund the Kite acquisition. Its debt is more than manageable: long-term debt to equity is 1.16 times. Conversely, Pfizer Inc.’s (NYSE:PFE) revenue fell 5% annually in the last five years.

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With its $1 billion, the stock trades at a P/E of 26 times. Revenue at Merck & Co. (NYSE:MRK) fell 5% annually. Its stock trades at 36 times. Yet Merck’s decision to end development of an HCV drug should have sent its shares lower.

The company’s forward 15x P/E may give investors one less reason to sell Merck stock. Given the HCV business is stabilizing for Gilead, one may even switch Merck stock for those of Gilead’s.

Optimism for Kite

Analysts jumped aboard on Gilead’s buyout of Kite Pharma. Barclay referred to Kite’s CAR T platform for the optimism and assigned a $90 price target. RBC set a $94 target. Kite has a large addressable market for CAR-T axicabtagene ciloleucel. That the FDA approved Novartis AG’s (NYSE:NVS) suggests Gilead’s Kite will gain approval, too. Gilead will reward patient investors if and when Kite’s CAR-T drug therapy launches.

Valuation

Based on the 10 models users on finbox.io built, the average target price for GILD stock is $94, a stock price of nearly 14% above the market price. The Revenue Multiples Valuation model may work the best in estimating the fair value of Gilead Sciences. Per finbox.io, this technique (also known as comparable companies analysis) compares operating metrics and valuation multiples of similar public companies to figure a value for the subject company.

GILD stock is best compared to AbbVie Inc. (NYSE:ABBV), Bristol-Myers Squib Company (NYSE:BMY), Pfizer, Inc. and Eli Lilly and Company (NYSE:LLY). These pharmaceutical companies all have stable businesses and an exceptionally good balance sheet.

Click to Enlarge

Source: finbox.io

Gilead has a stronger EBITDA profit margin profile than its competitors and even without the Kite acquisition, is expected to have a 10 year forward average 55.8% profit margin.

Gilead has a stronger EBITDA profit margin profile than its competitors and even without the Kite acquisition, is expected to have a 10 year forward average 55.8% profit margin.

Gilead also has the lowest EV / Fwd Revenue trading multiple.

Stable Core Business

Gilead’s future profitability is stable. At a healthcare conference, the company reiterated its bullishness in its HIV franchise. Generics, including generic tenofovir, is entering the market. But the company is launching TAF-based regimens that include Genvoya. This drug is the preferred treatment and already have more popularity than the alternatives.

Though AbbVie priced its Mavyret drug at the low-end along with giving big rebates, Gilead believes its Harvoni, the drug used to treat Hepatitis C, will compete favorably to hold market share.

Bottom Line on GILD Stock

Gilead Sciences had an exceptional run and could pull-back. Even at current levels, the stock is inexpensive relative to the growth potential. Value investors looking for exposure in the healthcare market should consider this company.

Author holds no shares in any of the companies mentioned.

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