Is Gilead Sciences a Value Stock?

Maybe, notes RBC Capital Markets’ Michael Yee and John Chung, who look at the free-cash-flow yield for Gilead Sciences (GILD) and Celgene (CELG).

They explain why the recent drops in Gilead Sciences and Celegene have them approaching value levels:

GILD trades at 10% and 12% free cash flow yield on 2015E and 2016E, respectively. Bears will say that’s because of an HCV cliff afterwards, but the point is when it trades at these levels it implies the market is already thinking it’s a cliff. This is similar to when GILD traded at similar levels of 10–15% FCF yields in 2010. [Celgene] is not too far behind at 7–9% FCF yield now, which is very cheap for a company growing at 20–25% over the next few years, and if they settle, there would be huge cash flows for the next 10–12 years without any issues.

Gilead is getting a boost today from data it presented at an industry meeting yesterday. JPMorgan’s Geoff Meacham and team explain:

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We would still argue that the data for Gilead's fixed dose combination (FDC) of Sovaldi + ledipasvir in GT1 treatment naïve hep C from the ION-3 trial have been among the most compelling in the field. Period. This is related to the very high SVR12 rates [No trace of HCV. Ed.] at 8 weeks (94% for 8wks and 95% for 12wks without RBV), which no company has been able to show. Merck's (MRK) SVR8 was 83% (25/30) on the 5172/8742 combo plus RBV for an 8wk treatment, which is not competitive and may decline with higher patient numbers. The physician feedback on ION-3 has been remarkable given very high cure rates in 8 weeks and a very clean safety profile.

Shares of Gilead Sciences gained 0.8% to $66.03 today, even as Celgene fell 2.2% to $136.90, the iShares Nasdaq Biotechnology ETF (IBB) dropped 2.9% to $215.45 and the SPDR S&P Biotech ETF (XBI) declined 4% to $124.60. Merck rose 0.1% to $55.92.