Wednesday, April 22, 2009

Gilead: Biotech No More

Gilead (GILD) just reported a blockbuster quarter.

I owned Gilead shares for couple of years, sold in 2008. Had an impressive gain (about 80% in couple years). Reasons for selling are outlined here.

Gilead is on the conversion path. It was a biotech company. Now it's becoming a plain drug company. Sure, it has a great HIV franchise, and a bunch of unique drugs. But we know from Jim Cramer's book "Real Money: Sane Investment in an Insane World" that biotech companies are valued on the base of their pipeline. At the time I decided to sell, company had a pipeline information on the web site. It was there, although it wasn't impressive at all. Now this information has gone. All you see are currently available drugs.

That's no good. Looks like current management decided to cut research expenses and live from current stock. Which changes investment conditions completely. Gilead currently trades at P/E 22, which is low value for a biotech company. But it's way too high for a drug company. For comparison, Pfizer (PFE) trades at P/E under 11. In other words, as a drug company, Gilead is twice overpriced. Of course, Gilead is a better company than Pfizer, it has longer patent protected terms for cash cow drugs, it's HIV franchise is peerless, so it probably can command higher P/E. But 22 feels too high, and company doesn't pay dividend.

I still don't see a reason to buy GILD. I can change my mind if company declares dividend or if stock pulls back significantly.

Full disclosure: at the time of publication author did not have any positions in GILD or PFE. Positions can change at any time.

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