A Bio-Pharmaceutical Trailblazer Up 77% in 2012

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the 2012 year draws to a close, I would like to pinpoint on a biopharmaceutical trailblazer up 77% in 2012, Gilead Sciences (NASDAQ: GILD).

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Strengths:

  • Explosive Revenue Growth: In 2006, Gilead Sciences reported revenue of $3.02 billion; in 2011, the company announced revenue of $8.39 billion, representing year over year annual growth of 22.67%, an explosive trend highly anticipated to sustain into the future with projections placing 2016 revenue at $17.11 billion; this growth is a result of the introduction of several new products and the integration of these into the market

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  • Institutional Vote of Confidence: 87.81% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Ideal Margins: At the moment Gilead possesses a net profit margin of 33.12%, representing a strong and profitable company; result of Gilead’s pricing power
  • Strong Product Portfolio & Diversification: Gilead operates in the United States, Europe, and Asia Pacific, as of the end of 2011 held 15 marketed products, treating illnesses from liver disease to aids to cardiovascular diseases, does not rely on one product to produce the entire company’s revenue, and is valued at $55.01 billion, all of which display a company with a strong product portfolio and a relatively diversified nature
  • Cash & Equivalents: Currently Gilead holds about $1.55 billion of cash and cash equivalents on their balance sheets, a major upside to the business

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Weaknesses:

  • Lack of Dividend: At no time in Gilead Science’s history has the company paid out a dividend, and the company has not expressed any plans to do so anytime in the near future, a major disadvantage to the company, especially in this volatile economic landscape
  • Inflated Valuation: Currently, Gilead carries a price to earnings ratio of 22.68, a price to sales ratio of 6.56, and a price to book ratio of 8.11, all of which point to a company vastly overvalued, however the company’s caliber of growth compensates for some of the valuation

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  • Debt: At the moment Gilead holds about $7.26 billion of debt on their balance sheets, a major downside to the business; much of this debt has been accumulated through research and development spending

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  • Operating Expenses: When a business grows such as Gilead’s has, the costs related to operating that business will expand, however over the past 5 years operating expenses have outgrown revenues, an ominous sign

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Opportunities:

  • Pipeline: Gilead is heavily invested in the revenue producing drugs of tomorrow, and as of the end of 2011, possessed 24 drugs in their pipelines, 6 of which were in phase 3, giving Gilead a rock solid pipeline filled with potential opportunity that should fuel growth
  • Acquisitions: In January 2012, Gilead acquired Pharmasset Incorporated, and further acquisitions in the future could fuel overall company growth and lead to new discoveries
  • Implementing a Dividend: Gilead currently has a sizeable pile of cash on its balance sheets, and while this money is more likely to be reinvested in the business to fuel growth, implementing a dividend is a possibility and opportunity for investors; Amgen, another fast growing biotech, implemented a dividend program in 2011 
  • Discoveries: In 2011, Gilead poured $1.23 billion into research and development, in hopes of producing new revenue producing discoveries

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Threats:

  • Competition: The biotechnology industry is extremely competitive, and Gilead has to battle with some of the largest and most powerful corporations in the world, which can lead to margin compression
  • Genetics: Genetics are biotechnology company’s worst nightmare, these cheaper alternatives can destroy Gilead’s pricing power and dismember a revenue stream for the company, revealing the importance of not relying on one drug
  • Government Regulation: In 2009, Obama proposed a budget that included a proposal to set up a regulatory pathway for companies to create generic versions of biotechnology drugs, which could have devastated Gilead, and further regulation proposals as Washington attempts to keep America from falling off the fiscal cliff could hurt Gilead’s business
  • Stagnant Economic Landscape: An economic landscape riddled with such uncertainty and stagnation can lead to people not having the money or insurance required to purchase Gilead’s expensive products, and the collapse of Medicare could further deepen the pain done to Gilead’s business

Competition:

Major publically traded competitors of Gilead Sciences include GlaxoSmithKline (NYSE: GSK), Bristol Myers Squibb (NYSE: BMY), Merck & Company (NYSE: MRK), and Pfizer (NYSE: PFE). All of these companies are major players in the biotechnology industry and compete with Gilead. GlaxoSmithKline is valued at $107.14 billion, pays out a dividend yielding 5.33%, and carries a price to earnings ratio of 13.59. Bristol Myers is valued at $53.05 billion, pays out a dividend yielding 4.36%, and carries a price to earnings ratio of 29.37. Merck is valued at $125.25 billion, pays out a dividend yielding 4.17%, and carries a price to earnings ratio of 18.72. Finally, Pfizer is valued at $185.10 billion, pays out a dividend yielding 3.82%, and carries a price to earnings ratio of 20.08. 

The Foolish Bottom Line:

Gilead is not one of these hit or miss pharmaceuticals who are betting their entire future on one drug, Gilead is a diversified giant with handfuls of products. The company possesses explosive revenue growth, strong margins, and a future packed to the brim with opportunity and growth. However, the company carries a high valuation and no dividend. All in all, Gilead has run up 77% in 2012, and is currently overpriced; however on any pullback is a tremendous investment for the long term.  


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Gilead Sciences and GlaxoSmithKline. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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