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Why Gilead Sciences Is Trading at a Discount Compared to Peers

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Valuation

On May 4, 2016, Gilead Sciences (GILD) was trading at a forward PE (price-to-earnings) multiple of about 6.9x. Since January 1, 2016, the company has been trading at PE multiples of 6.7x–8.4x. After the release of its 1Q16 earnings on April 28, 2016, the company’s PE multiples dropped by about 14.7%.

But since January 2014, Gilead Sciences has consistently traded at lower PE multiples than peers such as AbbVie (ABBV), Amgen (AMGN), and Celgene (CELG).

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Weak investor sentiment

Gilead Sciences has been regularly reporting strong revenue and income growth both in its HIV (human immunodeficiency virus) and HCV (hepatitis C) drug segments. But investor sentiment toward the future prospects of the company continue to be weak.

As competition has been gradually rising in the HCV segment, Gilead Sciences has become compelled to offer its drugs to health insurers at a substantial discount. This dynamic was witnessed in 1Q16, when the company saw a decline in YoY (year-over-year) HCV sales by about 6% and a sequential decline in sales by about 12%.

Key drugs and generic erosion

Additionally, the company’s key HIV drug, Viread or TDF (tenofovir disoproxil fumarate), is expected to lose its patent protection on July 25, 2017. TDF also forms a core component of the majority of Gilead Sciences’ HIV drugs.

Although the company has been launching an alternative and improved TAF-based (tenofovir alafenamide) HIV drugs in the market since 4Q15, there are still about 10 million patients who currently use TDF drugs. If Gilead Sciences fails to switch its TDF patient population to TAF-based drugs, it may result in generic erosion of the company’s HIV franchise revenues. These concerns have contributed to the slow growth of the company’s share price.

If investor sentiment continues to be depressed for Gilead Sciences, it may affect the share prices of PowerShares QQQ (QQQ). Gilead Sciences makes up about 2.4% of QQQ’s total portfolio holdings.

Now let’s explore analyst recommendations for Gilead Sciences versus peers.

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