Is Gilead Sciences The Most Attractive Stock in Biotech Industry?

Bernstein analysts evaluate how Gilead and Alexion stocks are more attractive than Regeneron, Amgen and Biogen.

Gilead Sciences Inc. and Alexion Pharmaceuticals Inc. looks to be the most appealing stocks after the latest sell-offs, as per analysts at Bernstein, Vincent Chen and Geoffrey Porges. The analysts have reaffirmed an Outperform rating and $131 stock price target on Gilead Sciences Inc., Alexion stock has also given Outperform rating with $250 stock target price.

The analysts said that stocks of company’s such as Biogen Inc. and Regeneron Pharmaceuticals Inc. might look better valued amid other stock of biotech industry, but Alexion and Gilead will remain the most attractive stock. The analysts have assigned an Outperform rating on all these stocks, except for Amgen, which has got Market Perform rating.

Followed by the selloffs, lately the valuation multiples for the industry look better compared to the market. The shares are currently more nicely priced than their prices over the last few years.

After the recent downturn in the stock market, the P/S and P/E ratios have slumped from levels, which were substantially, better than their past ratios, to levels which are according to the past ratios, and relatively lower than historical medians.

Gilead Science’s current price to earnings ratio is 8.7x, somewhat lower than its twelve month historic price to earnings ratio of around 10.5x. Similarly, its P/S ratio stands at 4.8x, marginally lower than its twelve month P/S ratio of 5.5 times.

The note states “Our analysis suggests biotech is generally cheaper, on an absolute and a relative basis based on earnings rather than revenue, but this suggests that expectations for revenue upside remain elevated.”

Talking about revenue, the analysts are optimistic that majority of stocks are presently trading in-line with their past medians, opposing to the high-levels they touched in the last few quarters. The analysts specified that any investment in these stocks for the time they are in their latest range is expected to be rewarded.

According to the report, amid the large cap bio-tech companies covered by the experts, Gilead, Regeneron and Biogen have reflected the maximum multiple compressions since the stock reached its year to date highs during mid-year. Gilead Sciences touched its all-time high of $123.37 in July, and is currently trading at $101.49.

Almost 26 analysts covered the Gilead, out of whom, 22 gave it a Buy, 3 suggests a Hold, while only 1 rated the stock as Sell. As per consensus estimate of around 18 analysts, the twelve month stock price target stands at $128.5.

Gilead And Amgen Drive Almost 71% Of Biotech Industry Profits: Bernstein Analysts

Bernstein analysts, in a recent research note, identify Amgen and Gilead as accounting for over 70% of the biotech industry’s total profit.

On Friday, Vincent Chen and Geoffrey Porges analysts at Bernstein analyzed the most value driving companies in the industry of bio-tech. Gilead Sciences, Inc. and Amgen, Inc. were recognized as 2 biotech companies that account for approximately for around three fourth of the bio-tech industry’s income pool. Gilead is one step forward with an above average ROIC (return on investment capital).

Both the analysts have measured the discussed industry’s profit on the basis of available and currently operating cash flow, which consist of a combination of research & development spending and adjusted cash flow, but eliminate stock awards and asset write down.

The analysts analyzed that the large cap size biotech industries pool has improved at a ten year compounded yearly growth rate of 16.4% to reach $38.8 billion in fiscal year 2014, from previous $9.9 billion in fiscal year 2005. If Gilead is kept out of the calculations, the industry profit pool only grew by 11.5% from $8.9 billion in fiscal year 2005 to $23.8 billion in fiscal year 2014.

The note states that among large cap bio-tech companies, Amgen Inc. had generated most cash flow in fiscal year 2005. The company made $7.1 billion in cash flows during the year, contributing almost 72% to the industry’s total profit. The scenario was totally different last year, when Gilead beat Amgen as the biggest cash flow generator, mainly because of its hepatitis C treatment drug, Sovaldi.

Introduced in December 2013, the hepatitis drug helped to lessen treatment time to almost 12 weeks, from 24 to 48 weeks, and significantly lowered negative side effects. Later, Gilead introduced Harvoni, an enhanced version of Sovaldi, in October last year, which further shorten the treatment times to 8 weeks. In the meantime, Amgen lost its overseas patent for its best seller, Enbrel, as well as United States exclusiveness on another top selling, Neupogen. Sales of Nepogen reduced further in fiscal year 2013 as it witnessed competition outside the country. Meanwhile, Gilead Sciences made $15 billion in cash flows for the period, making up nearly 39% of the total profit pool of the industry.

The analysts said, “Although growing in the absolute dollar amount, Amgen’s share of the industry profit pool has been shrinking over the years.”

The analysts noted that Gilead has continuously produced above average ROIC since fiscal year 2007. They also pointed out Alexion as a biotech company generating ROIC more than its peers since fiscal year 2011, after Gilead.

Gilead's stock was down 0.72% at $107 during pre-market session today.