Buy Thesis for a Pharmaceutical Company (2018) - FREE SAMPLE
Gilead Sciences (GILD) is the focus of this Buy Thesis. Gilead is a biopharmaceutical company focusing on five key areas of research: HIV, Hepatitis C, Oncology, Inflammation, and NASH.
Gilead Sciences is an attractive investment because the company is a cash cow with a growth based upside.
Important Information about this Investment
Company Name: Gilead Sciences, Inc.
Stock Ticker: GILD
Buy Thesis Preparation Date: July 8th, 2018
Current stock price: $75.21
My average purchase price: $71.05 (Range: $64.78-$75.40)
Acquisition Date Range: 12/30/2016 – 5/2/2018
Position Sizing Goal: 10% of the portfolio (Standard Full Position)
History of my investment in Gilead Sciences
Gilead Sciences came upon my radar in late 2016 as the stock price dropped from its all-time high of over $110 per share. When I first reviewed the company, the stock price had dropped below $80 per share and sentiment around the company was increasingly negative. I was attracted to Gilead as an investment because the company earned a very high amount of cash flow and the stock had a price to earnings ratio below 10.
As a value investor, P/E ratio’s below 10 are particularly attractive, because you automatically start with an earnings yield above 10%. However, the risk with this company was that revenues were falling and there was no end in sight. My Buy Thesis, therefore, focused on trying to determine when earnings would bottom and at what price they would bottom.
My initial theory was that falling Hepatitis C revenues would continue indefinitely, but that growing HIV revenues would offset this decline within a year. This theory proved to be wrong. It’s currently 2018, and although my initial purchase was in 2016, earnings have yet to officially bottom. Consequently, I have bought the stock at prices higher than my subsequent intrinsic value analysis could justify.
My initial estimate of intrinsic value solidly exceeded $100 per share. With the proper use of a margin of safety, such an intrinsic value would justify purchases in the mid $70 range, which is why I purchased stock as high as $75.40.
Current Estimate of Gilead Sciences’ Intrinsic Value
My current estimate of Gilead Sciences’ intrinsic value is based upon a fairly complex discounted cash flow model. Both company management and I face numerous uncertainties in projecting future revenues for Gilead. This results in a wide range of estimates for the Intrinsic Value of the company.
My current estimate of Gilead’s Intrinsic Value is somewhere between $82 and $125 per share. I’ve shared the key assumptions from my discounted cash flow model below.
Key Discounted Cash Flow Model Assumptions
10% discount rate
HCV sales decline by 20% annually this year, and 10-15% per year thereafter. (I believe in the long-term this is a conservative estimate because management projects earnings to stabilize here)
non-HCV sales grow by 7-10% annually for the next 10 years. (While less conservative, this is basically counting on small stable growth from HIV, and limited contribution from KITE’s oncology segment. NASH and inflammation would only provide upside here).
R&D and SG&A expenses grow by 3% per year. (I believe this is conservative because Gilead is already operating at a high R&D level compared to industry. This level of research should actually stabilize with stabilizing earnings.)
Stable Shares Outstanding (Management has made it a goal to now grow share count)
23% tax rate
Terminal EPS growth rate of 3%. (This is the biggest weak point in this analysis. I projected the other assumptions for 10 years and then set a terminal EPS growth rate. Perhaps it’d be more conservative to have a 0% terminal EPS growth rate. However, I believe this is reasonable because I have not taken credit for either NASH or Inflammation. If either of those is successful, then 3% growth should be possible, even though HIV sales will begin to decline in the 2030’s.
How should new investors consider Gilead Sciences
I have already attained my 10% position sizing goal for Gilead Sciences stock. I have steadily purchased my shares in the company over the last 20 months. I don’t plan on adding additional shares at this time or in the near future.
I currently plan to HOLD my shares of Gilead Sciences for the long term. As I discuss in my Gilead Sciences business quality report, this company has an excellent business model. Cash flows are protected by patents and very low competition. High gross margins allow the company to invest aggressively in R&D and acquisitions. Management meanwhile seems to be very science focused in their acquisitions. They have proven to be patient waiting for the right acquisition targets to add to Gilead’s portfolio and have a proven track record.
If you’re interested in Gilead as an investment, you should do some research on their five different business units: HIV, Hepatitis C, Oncology (namely, KITE Pharma), Inflammation, and NASH.
Gilead Sciences is a long-term holding for my portfolio
I am optimistic about the long-term future of Gilead Sciences as a company and as an investment. Currently, Gilead Sciences is the only pharmaceutical company in my investment portfolio. I would be happy to add additional pharmaceutical companies to the portfolio in the future. However, thus far, only Gilead has offered an attractive purchase price.
I believe that Gilead Sciences is in the early stages of laying the foundation to become a long-term major player in the Pharmaceutical industry. It is my hope that by having acquired my shares now, it would be like buying Johnson & Johnson stock in the 1970s and 80s. We’ll see if that comes to pass, but management is well aware of the risks that pharmaceutical companies face: lack diversification and bad acquisitions while attempting to diversify.
If Gilead’s management can continue to be prudent in spending shareholder capital to diversify the business, then shareholder should be well rewarded.
Gilead Sciences Future Buy Thesis
I cannot know your personal situation and risk tolerance, so you should not take any part of this Buy Thesis as investment advice or recommendation to buy or sell stock or securities. Understanding that disclaimer, I have thought about how I would personally buy additional shares as my portfolio grows. Basically, as my portfolio grows, my position sizing might shrink over time, so I want to know at what prices I would consider buying more shares.
Due to the large range of intrinsic values which I calculated ($82-$125 per share), I don’t have an exact figure on what price marks a reasonable margin of safety. However, my last purchase provides some insight. I most recently purchased shares in May 2018, and at a purchase price of $67.00 per share.
I think that the ballpark range of the mid-60s in share price offers an attractive range of outcomes for investors in Gilead. The company has hit the range of approximately $65 per share multiple times in the last couple years, and each time has provided a good entry point for me into this investment.
If I were to purchase shares in the future, $65 per share or below is where I would start considering the price attractive. Obviously, that target price will change as Gilead’s underlying business results change. Historically, my buy prices have had to be lowered over time, as business results have only gotten worse.
Therefore, it wouldn’t surprise me for that price to be available once again in the future. Especially in the event of a recession which could come at any point, based upon our current place in the business cycle.
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