The $1,000 Pill

GILD pill pic

Anyone who knows me well can attest that the world of science is not my strong suit.  I managed to get through AP Chemistry through rote memorization and very little practical understanding of what on earth a “mole” or “Venn diagram” really means.  If you want help on a paper maiche volcano or an explanation of what a gallbladder actually does, I am not your man for the job.

This is probably why I’ve always been under-allocated to science and healthcare-related stocks in my investment portfolio.  I have no common sense gauge to judge the risk of a business or how they might stack up to their competition.  With specific regards to biotech firms, I’ve always wanted to invest in them but the idea of relying on proprietary cures for diseases and ailments after years and years of regulated testing truly scares me.

Having said all of this, the ATG portfolio needs at least some healthcare/ biotech exposure.  I’m going to have to get over my personal insecurities in the sector and rely on (i) external research and feedback and (ii) a review of their basic financials to select a security for the portfolio.  After some basic screening, we are deciding whether to open a position in Gilead Sciences, Inc.  (GILD).

GILD has been on my radar for a while through a personal connection.  I have a friend who has worked for GILD for several years- unfortunately his frequent comments on the rapid growth and success of the company never quite resonated above the bar-room chatter about girls, sports, and who knows what else.

He directly recommended the stock to me again back in March 2014 (when it was around $70/ share) because the biotech stocks were getting hammered and he thought GILD’s earnings would pop with the release of their Hepatitis C drug Sovaldi.   I didn’t bite simply because the P/E was still scary high and I couldn’t justify taking a flyer on a new drug release.  When GILD reported Q1-14 earnings in April 2014, I wish I had trusted my friend’s inside perspective- GILD earnings tripled from the prior quarter with a 62% upside surprise to consensus estimates.

Ever since then, GILD has been on a tear to the point where their earnings (both on a trailing 12 months and forward year) now suggest value-stock pricing (14 trailing P/E and 10 forward P/E).  Below is a charge of their earnings growth over the past three years:

GILD earnings

In addition to an attractive P/E ratio, GILD has negligible debt, ample free cash flow, and a gaudy return on equity.  Additionally, a few different research reports I read about the company alluded to their market-leading and “strong economic moat” position in Hep C and HIV treatment drugs.  Sounds awesome, right?

Well, after a little juvenile research on their business I did find one red flag that causes me some concern.  It turns out that one of their main money makers, the Hep C drug Sovaldi mentioned above, literally costs $1,000/ pill, which translates to over $80k for a basic treatment.  In fact, they have a newer Hep C drug called Harvoni that will cost even more!  Here’s where I get nervous- maybe their Hep C drug is so superior that the market simply has to accept this pricing.  On the other hand, I can’t see Obamacare being down with covering that level of cost.   If they drop the hammer, the universe of people that can pay for the treatment out of pocket is probably equivalent to the current number of Weight Watcher members (sorry- that’s a deeply painful, inside joke).

ATG needs some biotech/ healthcare exposure and I’m still intrigued by the stock- the financial metrics are right up our alley and analyst coverage on the stock remains fairly bullish from what I can tell.  But my personal science background inadequacy and the $1,000 pill is giving me hesitation- please reach out to me if you have any advice or thoughts on this stock (or a better one in the sector)!!

-Maverick

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2 thoughts on “The $1,000 Pill

  1. So I think you are on the right tack, but there is a very good chance that pill will not cost that much for too long. I don’t know the time frame, but there is a distinct time frame for which this drug’s patents will protect other companies from making generic brands. After that time frame is up, the drugs chemical make-up will be public…and I think that is when prices will drop per pill. I could be off, but I think that’s the process in new drug pricing.

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