@Scott-
Hi Scott- I'm wondering what your thoughts are re GILD in view of the recent choppy water. I'm guessing that they may pull in their horns somewhat with US pricing, but it seems to me that they have a strong product, a decent moat, and the financial muscle to purchase additional technology resources should the opportunity occur. Are you adding on the lows, staying as-is, or reducing your position? I'm tempted to buy a bit more at these prices. I was interested to note that some of the company bigshots lightened up a bit prior to the current ruckus. Don't you love it?
Thanks-OJ
Comments
What occurred with GILD today was concerns over Merck's new Hep-C drug (late to the game, with warnings for doctors due to potential side effects and approved only for a narrower subset of patients; but the Merck drug's price caused concerns, despite the fact that it is what Gilead's drugs are with discounts.) Additionally, perhaps to some degree ABBV's poor quarter and how that may reflect on GILD's sales may have played some part. I have added a little recently in the mid $80's (which was successful for me when I added around these levels when there was the worries over ABBV's treatment was chosen by Express Scripts. I am probably not going to add more to biotech, there's other things that interest me in terms of adding to and I've been buying off/on over the last few weeks - added to Visa yesterday afternoon in the upper $60's AH, for example.
It's not been a good year for biotech in general (and that's to be expected in an election year), but I am not selling and I am both quite diversified in terms of individual names and am certainly more long-term focused. Thankfully, it was an exceptional day for me otherwise, lead by V/MA +7%/+6.5%, ICE+3.6% just off 52 wk high and a number of others.
Thanks for the note, have a good weekend.
You are correct about your assessment of its current strengths, but the problem with investing based on such assessment is that you can never predict how long it might take for that strength to materialize in gains (for any number of reasons including overall market conditions, sector problems, etc). Even if you feel you can stay in there for a long term, that strength may never be realized because of events that happen during that time which can be disruptive.
Personally, I don't think individual investors that don't have time/skills to put in a lot of effort into due diligence should be buying individual stocks. Almost, every time I have known something about a company, an investor's perception of that stock has always seemed erroneous based on a very small view into the company and also subjective sentiments unrelated to reality.
The problems above are particularly true in the pharma/biotech industries for their business model is based on a lumpy distribution across a few products that while it gives a big boost when it is created, can also as quickly disappear creating a significant dent in its revenues until it gets another lumpy revenue product out. This is why Apple's reliance primarily on the iPhone is getting its stock punished especially when there are margin threats. There are similar concerns over Gilead because of what people perceive as a price war looming in the industry.
Politics has very little to do with what is currently happening in the markets with Pharma/Biotech except indirectly as I describe below. Gilead as a large company is fighting headwinds in two fronts. As a pharmaceutical company selling brand names drugs, it is affected by pricing issues in the market. As a biotech company creating or acquiring new technologies and taking clinical trial and FDA approval risks, it is affected by sentiments across the entire biotech sector. Previously, it benefited from both fronts resulting in its meteoric rise. As they say in the industry, the easy money in Gilead may already have been made.
In the latter biotech front, as I have been posting since I got here there was a huge bubble as money poured into the sector indiscriminately from sector funds and ETFs and retail investors also piling on chasing returns. This led to a distortion of the earlier environment when VCs started to unload clinical stage or not yet FDA approved companies into the IPO market. This is like mortgage initiators unloading subprime mortages into the tranches that had a very huge demand upstream where no one cared about a single unit strength or viability. This snowballed as VCs put more money into startups because of the much higher IPO returns and that created more "subprime" biotechs. This had nothing to do with Gilead but Gilead rode the tailwinds more so than the other old pharma being considered more of a biotech itself.
Eventually, many of these biotechs started to fail in clinical stages or FDA approval and the bubble is collapsing. No idea when and where it will stop but that is just pulling all companies down for the same reason they all went up earlier. Money in broad funds and ETFs is getting pulled out. Gilead is facing those headwinds also and so part of its problem.
As a drug company, Merck's announcement of the competing drug which by all reports is as good as Gilead's was a bit of a game changer in that previously all these oligopolies priced with a gentlemen's agreement to not undercut each other in list prices and do unpublished discounting privately until generics were released. Merck, which people suspect, is using the political climate to mount a competitive offensive against other companies (and this is the only relevance from politics and not a bad thing for the consumer so not to blame politicians except to question why they didn't do this even earlier when it was NOT an election year) priced it publicly at the discounted price presumably to make others look bad or as part of investigations ongoing or in the future. This is seen as a change in the industry practice that could lead to a price war and crush margins for all. No one can predict what the resulting scenario will be but it is unlikely to be business as before. And this is another headwind for Gilead going forward at least until they can come out with another product and show the pricing power still exists. This may not just be an election year pressure.
Note that even being informed about all of these things won't let anyone make reasonable bets because things can change very quickly. This is why I think picking invidual stocks is a futile game even for some mutual fund managers unless they are spending a fortune in due diligence which typically they do not.
Gilead situation is also complicated from factors relating to a distinction in tech I have made earlier between companies where the marginal cost of a product once it has been created is at or close to zero as drugs typically are. I have seen this result in either total domination or sudden death because each company can produce practically unlimited amounts to occupy the whole market. Difficult for a competitor when one has a significant market share unless they compete on price and in the case of a marginal cost being near zero makes it that much easier to undercut prices to get market share. But higher the margins, greater the chances of a competitor even trying and if it succeeds, undercutting by a significant amount collapsing the market for the earlier one.
This does not happen in products where the marginal cost is not zero in that it still takes non-trivial part of the price to produce the next unit even with economies of scale. In such products, there tend to be multiple vendors with their own market shares surviving partly because the marginal costs limit how much cost cutting one can do and partly because products that incur such costs cannot be scaled up to occupy the entire market.
While the reason for Gilead CEO stepping down may be entirely personal, it might also indicate that the company foresees a different environment going forward and needs a new or different type of leadership. The two are not mutually exclusive. The problem is you or any retail investor will never know despite what is published.
I can't tell you what to do with the stock because honestly, I don't know with any level of confidence what might happen nor can most people in any individual stock. Individual stocks may have greater swings and so seem more profitable. Unless you are doing short term trading to exploit volatility, over a long enough period of time broader indices is likely to do just as well because individual companies go through tough times and most money these days moves quickly in and out of stocks.
Hope the above helps you in your future investments.
Thank you for your thoughts regarding this sector.
Regards,
Catch
Gilead as a large company is fighting headwinds in two fronts. As a pharmaceutical company selling brand names drugs, it is affected by pricing issues in the market. As a biotech company creating or acquiring new technologies and taking clinical trial and FDA approval risks, it is affected by sentiments across the entire biotech sector. Previously, it benefited from both fronts resulting in its meteoric rise. As they say in the industry, the easy money in Gilead may already have been made.
In the latter biotech front, as I have been posting since I got here there was a huge bubble as money poured into the sector indiscriminately from sector funds and ETFs and retail investors also piling on chasing returns. This led to a distortion of the earlier environment when VCs started to unload clinical stage or not yet FDA approved companies into the IPO market. This is like mortgage initiators unloading subprime mortages into the tranches that had a very huge demand upstream where no one cared about a single unit strength or viability. This snowballed as VCs put more money into startups because of the much higher IPO returns and that created more "subprime" biotechs. This had nothing to do with Gilead but Gilead rode the tailwinds more so than the other old pharma being considered more of a biotech itself.
VKT, best post I believe I have ever read on this board. Thanks and keep them coming. I commented months ago that I didn't like GILD for the simple reason it is projected to have a decrease in revenues and earnings in 2016. Of course, a couple strategic acquisitions could change all that. I think you are spot on about individual investors and the buying of individual stocks. Between $100 and $120 they have been beating the table here in a deafening fashion about the merits of GILD. There is one poster here who may be surprised to hear I actually respect him for his intelligence and insights/analysis on equities. Yet intelligence and all, his selections are among the worse I have ever seen in my 50 years at this game. I felt for the lemmings that blindly followed him into the MLPs in 2015. As for health care, the Hillary factor is still alive and well over the short term. As for the long term it's hard not to like this area, demographics and all. But that is a refrain I am hearing a bit too much. Too much herding in this sector, especially over the past year because of its outsized returns prior to that.
I think the "lumpy distribution" is an aspect which was not taken fully into account (or ignored) by the market overall, and the party for the bio's may be moderated in the near term as a result. With the costs for development of a new compound approaching $3 billion, it takes a wide platform of supporting products to carry the load while the pipe matures...unless of course you want to apply an Amazon-like model to drug development.
The analysis for Vanguard's Healthcare fund starts off with the banner headline "Not thrilling, but still appealing". As is turns out, "not thrilling" may be a feature, not a bug.
press
Now there is the added complexity of having to compete with Chinese money, especially in Europe where Governments are more willing to let Chinese buy up companies than in the US. Chinese will ensure that only such companies can really tap their domestic markets. Apple is finding that out as well. Some of GILD acquisition plans have been in Europe.
http://www.marketwatch.com/story/chemchina-to-buy-syngenta-in-43-billion-deal-2016-02-03
PS: Waking up to the sunshine and warmth almost everyday around here does wonders for one's optimism and ability to just go and do it, part of the not-so-secret recipe for success in these parts. But as you might know we do pay dearly for it in cost of everything here, lovingly known as the "weather tax".