Streetwise

Lauren Rudd

Sunday, July 15, 2012

Gullibility is Rich Fare for Those Who Feast on the Carrion of the Uninformed

In an effort to counteract the vagaries of Wall Street, investors are often persuaded to chase phantom opportunities in a relentless but futile pursuit of unrealistic gains. The apparitions of wealth that continually mesmerize and beckon the unsuspecting remind one of the Sirens in Greek mythology whose seductive songs lured sailors to their death.

Meanwhile, gullibility is rich fare for those who feast on the carrion of the uninformed. To quote from Idiot America by Charles Pierce, “Fact is that which enough people believe. Truth is determined by how fervently they believe it.”

There is no fault in listening to the vast myriad of investment ideas. It is when you act without sufficient due diligence that the price tag escalates exponentially. To use a more colloquial adage, proceed imprudently and your investment will resemble one of Florida’s renowned alligators...and you a hot lunch.

Ignore the endless parade of parasitic investment letters, TV performers and commission sales people, all touting the same repetitive monologue; they have the keys to hidden wealth...and you do not...but you could. Believe me, if they really had the answers they would not be living off subscriptions, advertisers and commissions. Now I know what you are thinking, so where are my investment ideas of late? That is a good question, so let’s look at Gilead Sciences.

A year ago I wrote that Gilead, a biopharmaceutical company that discovers, develops, and commercializes human therapeutics for the treatment of life threatening diseases worldwide, would post 2011 earnings of $4.00 per share, with a 12-month share price estimate of $48 for a capital gain of 15 percent. Unfortunately, earnings were only $3.86 per share and yet the price of the shares recently closed at $51.60.

Nonetheless, the company's strengths can be seen in multiple areas, including revenue growth, reasonable valuation levels, solid stock price performance, expanding profit margins and a solid financial position with reasonable debt levels. On the negative side is the subpar growth in net income, as evidenced by last year’s number.

Looking at first quarter results, revenues increased 19 percent to $2.28 billion when compared to the first quarter of 2011. Net income for the first quarter was $0.57 per share, as compared to $0.80 per share a year ago. However, that number included acquisition-related compensation expenses of $0.25 per share for the acceleration of unvested stock options in connection with the Pharmasset acquisition.

Non-GAAP net income for the first quarter of 2012, which excludes acquisition-related, restructuring and stock-based compensation expenses, was $0.91 per share as compared to non-GAAP earnings of $0.87 per share for the first quarter of 2011.

Some points to keep in mind when looking at Gilead are the fact that most of the company's patents don't expire until 2017 or later, an important issue given that three of the Company's 14 marketed drugs are responsible for most of its revenue.

In response to dependency on three key products, Gilead spent $11 billion last year to purchase Pharmasset in order to gain the rights to what is now called GS-7977, a hepatitis-C oral treatment that eliminated the virus in most patients within just four weeks when combined with Bristol-Myers Squibb's daclatasvir.

And Gilead has a potential blockbuster in cobicistat. Cobicistat, if approved, could be the key to creating the first four-in-one pill whereby Gilead uses the combination drugs in Truvada and Atripla to create an HIV super-pill. In short, its approval or rejection has huge implications.