Gilead Sciences Reports Third Quarter 2009

Gilead Sciences (GILD) reported stellar revenues and profits for it third quarter 2009, featuring revenues up 30% from the year-earlier quarter and GAAP EPS up 38% from last year. See my Gilead analyst conference summary for October 20, 2009 for details.

So why did the stock price fall today, and why does it have such a low price to earnings ratio? I own the stock because I think it is one of those rare value plus growth stocks. There are some factors in this quarter's revenues that may be non-recurring. Notably, because of the swine flu scare royalties from Tamiflu (sold by Roche) were $113.5 million. When the flu season is over those revenues are likely to dive back towards normal. This also has a heavy effect on net income and earnings per share because royalties don't entail costs. The drugs that Gilead does sell are expensive to manufacturer.

But I think the main reason investors shy away from Gilead is that its focus is on anti-viral drugs, particularly HIV (AIDS) drugs.

There is every reason to expect that HIV drugs will continue to be a rapidly growing global market, and medical concensus is that Gilead's Atripla is the best drug available.

In addition Gilead makes drugs for Hepatitis and is moving into the cardiovascular field, where its Ranexa for chronic angina already racked up $49 million in revenues for the quarter.

Normally, I would expect a company like Gilead to have a price-to-earnings ratio of at least 25 to 1; in a bull market more like 50 to 1. According to the Nasdaq web site (which uses non-GAAP measures), today Gilead's P/E ratio (trailing) is 17.39 and forward looking P/E is 15.6.

It may not matter, in the long run, that some investors see Gilead as a yucky HIV stock. Gilead is generating cash. Part of it gets used for acquiring companies or rights to therapies. But management announced yesterday that $1 billion will be used for share buy backs.

What I would like to see, instead of or in addition to share buy backs, is dividends. The company is large enough and stable enough to pay dividends, which are the gold standard of investing. You can't argue much with dividends.

As with any company, there are risks in buying Gilead Sciences stock, notably competition to introduce new therapies that may drive down the value of old therapies, and the expiration of patent rights.

So keep diversified!