Gilead: Pharma Innovation Leader with Long-Term Patent Protection

Gary Mishuris presented his in-depth investment thesis on Gilead Sciences (Nasdaq: GILD) at Wide-Moat Investing Summit 2017.

Gilead is a pharmaceutical company with two main revenue streams — Hepatitis C and HIV medications. The former is in a state of decline, as the company has been able to bring a cure to market. The Hepatitis C business peaked in 2015 and is now best thought of as a run-off book of business, with the main question concerning the rate of decline. The HIV revenue stream, on the other hand, is likely to grow. The company commands 75+% market share in this category and has recently launched a new generation of drugs that will extend patent protection for over a decade.

While competition is a potential risk, the market is growing and the company has pricing power. The two main businesses, plus substantial excess cash on the balance sheet and the value of the R&D pipeline make-up the four components of intrinsic value. Gilead is an excellent business due to its strong competitive position and long-term patent protection, with an excellent balance sheet, and an above-average management team.

Gary’s estimate of the company’s intrinsic value, arrived at via a DCF analysis, puts the stock at less than 65% of his base case value. The non-linear nature of the two revenue streams makes this a more difficult-than-usual situation for most market participants to analyze, as the overall earnings stream is declining due to the run-off of the Hepatitis C business. This, combined with pessimism about the R&D pipeline and skepticism regarding realizing the value of the company’s cash position, is causing market participants to misprice the stock.

A quote related to the art of value investing:

I had an insight seven or eight years ago that helped me as a value investor — ‘the price asks the question’. If the price is $100 instead of $65, the questions you have to answer to be right on an investment are different. If the price is $20, they are also different. It is not just what the business is and what the company does, but what questions do you have to answer correctly at this price to make it a good investment?

About the instructor:

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm with a concentrated long-term intrinsic value strategy. Prior to founding the firm in 2016, Mr. Mishuris was a Managing Director at Manulife Asset Management since 2011, where he was the Lead Portfolio Manager of the US Focused Value strategy. From 2004 through 2010, Mr. Mishuris was a Vice President at Evergreen Investments (later part of Wells Capital Management) where he started as an Equity Analyst and assumed roles with increasing responsibilities, including serving as the co-PM of the Large Cap Value strategy between 2007 and 2010. He began his career in 2001 at Fidelity as an Equity Research Associate. Mr. Mishuris received a S.B. in Computer Science and a S.B. in Economics from the Massachusetts Institute of Technology (MIT).