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Why Is Gilead Sciences Trading at a Cheap Valuation?

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Sep. 23 2016, Updated 10:12 a.m. ET

Valuation multiples

On September 22, 2016, Gilead Sciences (GILD) was trading at a forward PE (price-to-earnings) multiple of about 6.9x. Gilead Sciences is trading at a much lower forward PE multiple than its industry peers such as Celgene (CELG), Amgen (AMGN), and Biogen (BIIB). These peers are trading at forward PE multiples of ~19x, 15.3x, and 15.5x, respectively.

The above graph compares the forward PE multiples of Gilead Sciences and its peers. The forward PE multiple is a relative valuation multiple used for comparative analysis of peer companies.

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Gilead Sciences’ valuation fundamentals

Since the beginning of 2016, Gilead Sciences has traded at PE multiples of 6.7x–7.1x. Since the release of its 2Q16 earnings results on July 25, 2016, Gilead Sciences’ share price and valuations have fallen. The fall was triggered by weak investor confidence in the company due to weak 2Q16 results. The results were weighed down by falling sales of the company’s HCV (Hepatitis C) blockbuster drug Harvoni. Its sales fell due to pricing pressures, lower new patient volumes, and stiff competition from peers. The company’s valuations are expected to continue to be impacted in the near future. Gilead Sciences will be impacted by falling HCV sales and its weaker market position due to the patent expiration of its HIV drug Viread in July 2017. However, the company’s cheap valuation—despite its strong product pipeline, strong cash flows, and high margins—provides a potential investment opportunity for long-term investors. Moreover, Gilead Sciences’ consistent dividend payouts and share repurchases provide consistent value to its shareholders.

During its 2Q16 results announcement, Gilead Sciences lowered its fiscal 2016 guidance amid weak HCV sales. Another fall in Gilead Sciences’ valuation and share price will also impact the iShares Nasdaq Biotechnology ETF (IBB). IBB holds ~7.2% of its total holdings in Gilead Sciences. For a brief discussion on Gilead Sciences’ 2Q16 performance, read How Gilead Sciences Performed in 2Q16.

Next, let’s look at Gilead Sciences’ recent stock performance.

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