Gilead Price Reductions No Big Deal

Summary

Pricing concerns have lead to a valuation that anticipates a very high reduction in Gilead's profitability.
Price regulation is improbable and would take place only in the US.
Price reductions can trigger an even stronger increase in demand, especially in Europe and Japan, where penetration is still low.

Gilead Sciences (NASDAQ:GILD) develops and markets innovative medicines for the treatment of several life-threatening diseases such as Hepatitis C and AIDS.

The company's turnover and profits have skyrocketed during the last few years, as a result of the successful launch of two medicines for Hepatitis C: Harvoni and Sovaldi, which together account for about 60% of Gilead Sciences' total Revenue.

The company is now trading at 7.8 times P/E and 7.3 times P/FCF.

Pricing Concerns

The main reason why GILD is trading as such low multiples is related to the fear that pressure on pricing of several drugs could reduce the company's profitability. The success of pharmaceutical companies is strongly linked to the availability of funding from government or third parties that can cover the cost of the treatments, but these institutions exert significant pressures on the pricing of drugs and some of them are trying to regulate the price of drugs and medical services.

Drugs for HIV and HCV are particularly affected by this kind of pressure, and since they constitute a substantial portion of Gilead Sciences' portfolio, it is clear that there is a lot of uncertainty surrounding the cash flows that the company will be able to generate.

Regarding HIV products, in the U.S., a significant portion of HIV products is bought by the ADAPs (AIDS Drug Assistance Program), that relies heavily on federal and state funding. When this funds are not enough to cover the necessary expenses to treat all the necessary patients, the states usually tighten the access to funding through more strict eligibility criteria. Therefore more people end up on waiting lists.