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Analyst Blog

Gilead Sciences, Inc. (GILD - Free Report) , one of the key players in the biotech market, has had a phenomenal run over the last five years with shares gaining 195.1% during this period compared to the Zacks-categorized Medical-Biomedical/Genetics industry growth of 51.8%.

From a valuation perspective, the stock looks pretty tempting -- going by the current price-to-earnings multiple, which is often used to value drug stocks, Gilead is trading at a P/E multiple of 8.72, well below the S&P 500 P/E multiple of 17.98. That looks pretty cheap and if you see the valuation history for Gilead over the last 5 years, there could be plenty of room for upside given the company’s 5-year high of 25.60.

Gilead also looks cheap compared to some of the other key players in the hepatitis C virus (HCV) and HIV markets like Merck & Co., Inc. (MRK - Free Report) and GlaxoSmithKline plc (GSK - Free Report) as well as other big biotech stocks like Amgen Inc. (AMGN - Free Report) and Celgene Corporation (CELG - Free Report) .

However, shares of the company have been battered over the last one year with Gilead recording a decline of 25.4% compared to the industry decline of 1.4%. The chart below shows that the company has underperformed the industry year to date as well.

So is Gilead really a value play?

Despite reporting better-than-expected results for 4Q16, Gilead’s shares declined on the company’s 2017 guidance, which fell well short of expectations. Although a decline in sales of the company’s struggling HCV franchise was largely expected, the magnitude of decline was more than anticipated. The HCV franchise, which delivered sales of about $14.8 billion in 2016, is expected to deliver sales of $7.5 - $9 billion this year. That’s a pretty steep decline for what was once a huge revenue generator for the company. Meanwhile, overall product sales are now expected in the range of $22.5 - $24.5 billion in 2017, down from almost $30 billion in 2016.

The company’s HIV franchise should do well but competition in this area is intense and on the rise. Gilead is also facing generic competition for some of its products and could start seeing generics for additional products enter the market this year itself. With these issues in store, it could be challenging for Gilead to repeat its record performance ever since its HCV franchise took off.



Moreover, earnings estimates for both 2017 and 2018 have been declining significantly with 2017 estimates down 23.4% and 2018 estimates down 26.3% over the last 60 days.

So although Gilead’s valuation looks compelling, there is a lot of uncertainty associated with the stock -- the declining estimates, increasing competition, patent expiries and lack of major product launches/near-term pipeline catalysts keep us on the sidelines. While Gilead is a Zacks Rank #4 (Sell) stock, you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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