Pat McKeough responds to many requests from members of his Inner Circle. Every week, his comments on the most intriguing questions of the past week go out to all Inner Circle members. Each week, we offer you a highlight from these Q&A sessions. Today we profile one of the aggressive growth stocks in the pharma industry—Monday we look at a big pharma stock we rate as a sell.
Q: Pat: What is your recommendation on Gilead Sciences? Thank you.
A: Gilead Sciences Inc. (symbol GILD on Nasdaq; www.gilead.com) discovers, develops and markets treatments for viruses.
The company’s two newest hepatitis C drugs, Sovaldi and Harvoni, continue to perform well. In 2014, Gilead sold $10.3 billion worth of Sovaldi, which it started selling in December 2013, and $2.1 billion of Harvoni, introduced in October 2014.
Hepatitis refers to both the inflammation of the liver and a group of viral infections that affect the liver. The most common types are hepatitis A, hepatitis B and hepatitis C. Viral hepatitis is the leading cause of liver cancer and the most common reason why patients need liver transplants.
Gilead has developed a wide range of treatments to counteract hepatitis C. This is one of the major reasons why the shares have more than doubled in the past year.
The market for hepatitis treatments is huge, with over 150 million people worldwide suffering from one of the hepatitis viruses. Hepatitis C is the most common strain and the one Gilead has the most experience with.
Growth stock: High cost of two leading hepatitis C drugs presents challenges for Gilead
Sovaldi and Harvoni have become the most popular hepatitis C drugs because they’ve proven to be more effective than their competitors and only need to be taken once a day in pill form. (Harvoni is a combination of Sovaldi and a second drug in a single pill.) The closest competition, AbbVie’s Viekira Pak, requires four pills day.
However, Sovaldi and Harvoni are very expensive, which has presented challenges for Gilead, even though it must charge a lot to recoup its huge research and development costs.
Harvoni costs $94,500 for a typical 12-week course of therapy, while Sovaldi sells for $84,000 for 12 weeks (AbbVie’s Viekira Pak sells for $83,000 for 12 weeks).
The high prices have drawn complaints from a range of organizations, including pharmacy benefit managers, health care providers, the U.S. Department of Veterans Affairs, Medicaid programs, prison systems, foreign governments and Doctors Without Borders.
Gilead has responded with targeted price cuts to maintain market share in the U.S. and internationally. It has also entered into profit-sharing arrangements with generic drug firms to sell copies of the medicines in poorer countries.
Nonetheless, the global hepatitis C market is so big that Gilead should keep reporting rising earnings. The company is also planning to start paying a quarterly dividend of $0.43 a share in the second quarter of 2015, for a 1.7% yield, based on today’s price. In addition, it will buy back a further $15 billion worth of its shares.
The stock trades at 10.8 times this year’s forecast earnings of $9.55 a share.
Inner Circle recommendation: HOLD for aggressive investors only.
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Pat McKeough responds to many requests from members of his Inner Circle. Every week, his comments on the most intriguing questions of the past week go out to all Inner Circle members. Each week, we offer you a highlight from these Q&A sessions. Today we profile one of the aggressive growth stocks in the pharma industry—Monday we look at a big pharma stock we rate as a sell. 
