Biotech Values

[Rocky3]

From Barron's:

WITH VALUE SUDDENLY THE COOL KID on the block, a few analysts have gotten it into their heads that some of the market's fastest-growing stocks should be grouped in that camp. Consider Gilead Sciences (GILD). On Tuesday, the biotechnology giant reported a profit of $2.2 billion, tripling its profit of a year ago. That's thanks to the runaway success of its hepatitis C drug Sovaldi, which had sales of $2.3 billion during the first quarter, making it one of the most successful drug launches ever. Even after this week's big jump in profit, Gilead still trades at 26.7 times its past 12 months of earnings. "You have to extend the imagination a bit to consider Gilead a value stock," says Stephen Shueh, managing partner at Roundview Capital.

But there's merit to the value argument. Analysts expect Gilead to earn $10.1 billion in 2014, up from $3.1 billion last year, meaning it trades with a forward price/earnings ratio of 12.4, after falling 12% from its Feb. 25 high. Its valuation is now 3.5 points lower than the S&P 500's P/E of 15.9.

Why the big difference in forward- and backward-looking multiples? It all comes down to the sustainability of Sovaldi's sales. Gilead bears see pressure to reduce Sovaldi's $90,000 price tag, looming competition, and even its effectiveness as reasons that the big boost provided by Gilead's wonder drug won't last past 2015. The bulls, however, believe that Sovaldi is so good that it will be the treatment of choice, enabling Gilead to keep discounts manageable and sales high. The answer probably falls somewhere in between.

That doesn't make it your typical bargain, but it could mean that Gilead is something else, Shueh says: Growth at a reasonable price. That's not bad, either.