Streetwise

Lauren Rudd

Sunday, June 23, 2013

Gullibility is Rich Fare

The apparitions that continually mesmerize and beckon the unsuspecting were well-illustrated during Fed Chairman Ben Bernanke’s recent news conference. Bernanke's confirmation that the Fed is always considering when to begin reducing its $85 billion in monthly asset purchases sent stocks tumbling and Treasury yields to a 15-month high. Such activity reminds one of the Sirens in Greek mythology whose seductive songs lured sailors to their death.

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 a myriad of opinions. It is when you act without sufficient due diligence that the price tag of error escalates exponentially. 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, advertisements and commissions. Now I know what you are thinking, what constitutes a good investment idea? Good question; a good answer might be to look at a company such as Gilead Sciences (GILD), a biopharmaceutical company that discovers, develops, and commercializes human therapeutics for the treatment of life threatening diseases worldwide.

Gilead’s market value continues to appreciate thanks to its stellar research and development programs. Gilead dominates the Hepatitis C Virus (HCV) treatment market, and has an upcoming priority review of sofosbuvir, an experimental drug for the treatment of hepatitis C.

Sofosbuvir was discovered at Pharmasset (now a part of Gilead) and is currently in Phase III clinical trials. If successful, sofosbuvir could continue Gilead’s HCV domination for the foreseeable future. Nonetheless, Gilead faces unrelenting competition from Bristol Myers Squibb and Abbott Laboratories in the HCV space. Both of those companies are developing their own Interferon/Ribavirin free HCV treatments.

Nonetheless, Gilead continues to dominate the HCV market and has a worldwide market share of more than 80 percent. As the awareness grows in developing countries and HCV treatment penetration increases, this market will continue to outgrow expectations.

A year ago I wrote that Gilead, would post 2012 earnings of $1.94 per share, with a 12-month share price estimate of $30, after allowing for a 2-for-1 stock split effective January 25, 2013. So how did the company do? Gilead’s shares recently closed at $51.94, well above my estimate. Earnings came in at $3.08 billion or $1.95 per share, a penny over my estimate.

For the first quarter ended March 31, 2013, Gilead fell slightly short of the Street’s unreasonably high expectations. The Street was expecting earnings of $0.50, but Gilead only managed $0.48, on revenues of $2.5 billion. For the same period a year ago, Gilead earned $0.45 per share. The miss was due to a number of short term reasons, such as inventory drawdown and a rise in R&D. The sales miss was due to the estimates miss by the HIV treatments Truvada and Atripla.

Gilead continues to work on its pipeline new products and has increased its R&D efforts. There has been a slight decrease in SG&A expenses, which will improve margins in coming quarters. The growth in Stribild and Complera (also human immunodeficiency virus or HIV drugs) was also unprecedented, and both drugs exceeded expectations. There are indications that the Stribild franchise will continue to grow due to increased usage of integrase inhibitors in treating HIV.