Options Trade of the Week
Gilead Sciences (NASDAQ:GILD) Calls
Tuesday, September 30, 2014

**OPTIONS TRADE OF THE WEEK: Buy the GILD Nov 2014 110.000 call (GILD141122C00110000) at or under $5.00, good for the day. Place a protective stop limit at $2.00 and a pre-determined sell at $8.50.

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by Ian Harvey

September 30, 2014

Introduction

**GILEAD SCIENCES KEEPS ON KEEPING ON! **

Gilead Sciences (NASDAQ: GILD), the Foster City, California-based biopharmaceutical company known for its flagship drugs like Sovaldi, Atripla and Zydelig, is a forerunner in the treatment of HIV, liver diseases and oncology & respiratory diseases. It is one of the most attractive stocks in the sector at the moment - the stock has shown solid price movement over the last few months and the growth prospects, which makes it an extremely attractive investment. The company has been on a continuous uptrend over the last four quarters, and seems set to continue on this trend -- up 64% last four months, 43% YTD, 77% last twelve months, and yet it seems particularly realistic to say that it looks as if it will continue the momentum.

The company has been one of the outstanding mega-cap performers over the last few quarters as investors continue to bet on its promising product pipeline. The company has blown analyst estimates for each of the last four quarters at incredible rates, resulting in a bullish sentiment among the investment community.

It is expected that Gilead will blow Q3 analyst estimates as well, after beating consensus estimates for the last four consecutive quarters.

Analysts have raised the stock's target price, and expect the price to appreciate in the future. All of the analysts have positive outlooks regarding the company's strong hepatitis portfolio, which consists of the blockbuster drug Sovaldi and the extended TAF (son-of-Viread). Despite heavy criticism on its $1,000 per-pill price tag, Gilead's breakthrough, Sovaldi, has become one of the most recommended drugs by doctors in the U.S. and Europe. This has catapulted Gilead into the ranks of top-selling pharmaceutical companies.

Some of the analysts have lifted their forecasts for Gilead's third-quarter earnings, as it is expected that Sovaldi will continue its massive sales. The analysis of the first two months of the third quarter and a projection for the remaining month show U.S. Sovaldi prescriptions tracking above analysts' previous estimates. Therefore, the drug's U.S. sales estimated for the third quarter is raised to $2.24 billion from the previous estimate of $1.94 billion. Accordingly, the drug's worldwide sales estimate for the quarter is raised to $2.97 billion.

Besides Sovaldi, the analysts are also looking for positive results from the Phase III studies of TAF, the follow-on, improved version of the hepatitis B and HIV drug Viread, later in the third quarter. Gilead expects that TAF is a more potent pro-drug of Viread, and has similar efficacy but less long-term kidney damage and bone mineral density loss (BMD). This is an important clinical catalyst for its core HIV franchise, which is already very strong.

Technical Oulook

Gilead is one of the hottest biotech mega-cap stocks in the market right now, with a one year low of $58.81 and a one year high of $110.64. The stock has a 50-day moving average of $103.4 and a 200-day moving average of $86.20. The company has a market cap of $163.9 billion and a price-to-earnings ratio of 24.55.

The stock is trading at trailing 12 months' P/E of 24x, and the EPS is expected to increase to at least $7 for FY14, which gives a forward P/E of only 15x.

Note that the industry average for the trailing 12-month P/E is pegged at 32x, while the sector average stands at 33x. Therefore, this means that despite the company's recent rally, it realistically appears cheaper when compared to the overall industry. This means that the company could trade at a forward P/E of 20-24 times and still appear realistically valued. This would mean that Gilead could trade at a price of $140 to $168 by the end of 2014.

Therefore, this suggests that there is a possibility that Gilead has an upside potential of roughly 50% going forward. Any pullback will provide an even better buying opportunity, which has been occurring recently with a sidelines trading movement – ready for the next jump upwards.

Earnings

Gilead Sciences last announced its earnings results on Wednesday, July 23rd. The company reported its second-quarter 2014 earnings, topping analysts' estimates of the record sales of this blockbuster hepatitis C drug, with $2.36 earnings per share for the quarter, beating the analysts’ consensus estimate of $1.73 by $0.63. The company had revenue of $6.53 billion for the quarter, compared to the consensus estimate of $5.68 billion.

During the same quarter last year, the company posted $0.50 earnings per share. Gilead Sciences’s revenue was up 136.1% compared to the same quarter last year. Analysts expect that Gilead Sciences will post $8.04 EPS for the current fiscal year.

The revenues from the drug rose to $3.48 billion in this quarter, up from $2.3 billion in the first quarter, reaching a total of $5.8 billion sales since its approval in December 2013. Sovaldi contributed approximately 55% to Gilead's top line in the second quarter of 2014.

Plenty of Potential

1. Need for Hepatitis Drugs

Hepatitis is a big global problem, with one of the highest incidence rates. According to the World Health Organization, more than 130 million people are infected with hepatitis C, and 350,000 to 500,000 people die from the disease each year. The prevalence of the disease is surging dramatically in the U.S. as well, and it is estimated that more than 3.2 million Americans are infected with hepatitis C and approximately 75% to 85% will develop a chronic infection.

The high prevalence of hepatitis will keep driving Gilead's revenues, making the company an attractive investment opportunity.

2. Plenty of Liquidity

Sovaldi not only helped Gilead to generate hefty revenues, but also boosted the company's operating cash flow. The operating cash flows increased 340% year-over-year, primarily due to the growth in this blockbuster drug in the second quarter and collections related to the drug's sales increase in Q1'14.

At the end of second quarter, Gilead's cash pile was $9.58 billion, compared to the $2.57 billion reported at the end of December 2013, reflecting a growth of more than 270% in the first half of 2014. It is anticipated that the company's cash reserve will reach $15 billion, and will be used to further strengthen its pipeline.

3. Investor Returns Attractive

Gilead is making excellent use of its pile of money from an investor's perspective, as the company continues buying back its shares. In the second quarter, it repurchased $1.2 billion of its stock (15 million shares) at an average price of $79.07 per share. In addition to its January 2011 buyback program, which has $2.9 billion remaining in the plan and is projected to be completed by the next quarter, Gilead has authorized a new program to repurchase $5 billion of its common stock. The new program would expire three years after the completion of its current program.

Gilead is effectively sharing its success with the shareholders through these buyback programs.

4. Valuation Applicable

Based on a Comparable Valuation approach, the stock's fair value is $124.31, reflecting an upside potential of 14.44%.

Drug Approval a Further Boost

The Food and Drug Administration's decision on Gilead Sciences next generation hepatitis C treatment will soon be apparent. Most expect that the regulator will give the Sovaldi and ledipasvir combination drug the green light when it makes its decision on October 10, but Gilead isn't sitting back on its heels waiting. The company announced this week that it's also submitted the Sovaldi and ledipasvir one-drug therapy for approval in Japan, one of the globe's biggest markets for hepatitis C treatment.

The move is an important one because it could ultimately allow Gilead to erase Bristol Myers (NYSE: BMY) early lead in that market, potentially giving Gilead an opportunity to capture billions of dollars in sales.

Analysts Opinions

Deutsche Bank reissued their buy rating on shares of Gilead Sciences in a research report released on Thursday morning. Deutsche Bank currently has a $142.00 price objective on the stock.

The company has also been the subject of a number of other research reports:-

• Analysts at Needham & Company LLC raised their price target on shares of Gilead Sciences from $95.00 to $120.00 in a research note on Wednesday, September 24th. They now have a buy rating on the stock.

• Separately, analysts at Citigroup Inc. reiterated a buy rating on shares of Gilead Sciences in a research note on Friday, September 19th. They now have a $139.00 price target on the stock, up previously from $111.00.

• Finally, analysts at S&P Equity Research reiterated a strong-buy rating on shares of Gilead Sciences in a research note on Tuesday, September 16th.

One analyst has rated the stock with a hold rating, twenty-two have assigned a buy rating and one has given a strong buy rating to the company. Gilead Sciences currently has a consensus rating of Buy and an average target price of $108.95.

Summary

• Gilead has become one of the top stock picks of many industry experts, and the target price for its stock has been raised.
• Analysts are still positive about the blockbuster Sovaldi, which is generating better-than-projected revenues in the third quarter as well.
• Analysts are also looking for positive results from the Phase III studies of TAF (son-of-Viread) later in the third quarter.
• Gilead's stock is currently offering an upside of 14.46%, based upon a comparable valuation approach.
• Wide economic moat, strong pricing power and low operating expenses will allow the company to continue growth in its fundamentals.
• Additional sales from HIV drugs will result in substantial rise in revenues and earnings, which will bring its multiples further down.
• The company makes huge gross (56.15 percent) and net (42.8 percent) profit margins. Those margins translate into a levered free cash flow of $5.85 billion annually.
• The company has more than $8 billion in cash reserves.
• Current ratio of 2.49.
• Debt-to-equity ratio of 57.73 percent.
• The company's valuation is still cheap based on its price-to-earnings ratio of around 12 (based on 2015 estimates), especially compared to revenue growth estimates of 14.4 percent for 2015 and EPS growth estimates of 17 percent for next year.
• The stock's technicals are extremely bullish overall.

Conclusion

Gilead is realizing staggering revenue and earnings growth, thanks to its healthy hepatitis and HIV portfolios. Analysts expect the earnings growth to remain strong in the third quarter as well, as Sovaldi continues to generate massive revenues for the company. The company also plans to generously distribute these returns to investors, as depicted by its share repurchase programs. The stock also has considerable growth potential, so this options trade looks sound.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE OF THE WEEK: Buy the GILD Nov 2014 110.000 call (GILD141122C00110000) at or under $5.00, good for the day. Place a protective stop limit at $2.00 and a pre-determined sell at $8.50.


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