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Baume et pomme

28 October 2015 By Robert Cyran

There are no simple cures for the valuations of Gilead Sciences and Apple. Like the $670 billion iPhone maker, the $158 billion biotech is the leader in its industry and churns out hefty profit. Yet its stock trades at a big price-to-earnings discount to the broader market. Investor impatience for astonishing new products – and fears that neither company will find them – borders on the irrational.

Like Apple, Gilead’s success comes from developing things that “just work,” and charging premium prices for them. Gilead’s Harvoni cures nearly all patients of hepatitis C, for which it’s prescribed, with far fewer adverse effects than previous treatments. Much as Apple continually adds features to its phone, Gilead develops new molecules to add to its drug cocktail, making it useful against different strains of the disease. That’s why Gilead prices Harvoni at more than $90,000 per patient, and has about 90 percent of the market for the most common form of the liver malady in America.

Even though the company shot past Wall Street’s expectations with $4.6 billion in quarterly profit late Tuesday, the stock dropped 3 percent. Again, much like Apple, investors in the drug company are concerned about reliance on one product. Gilead now reaps almost 60 percent of its sales from treating hepatitis C. Apple depends a bit more on revenue from selling iPhones.

If the companies can’t find new hits, there’s potential reason to worry. Nearly everyone who can afford a smartphone has one. If innovation slows, devices could become low-margin commodities. Harvoni’s sales may have already reached a plateau – and eventually demand may fall if its patients are cured.

Despite their massive market capitalizations, Apple and Gilead attract deep investor skepticism as a result. Apple trades at 12 times estimated 2016 earnings and Gilead fetches 9.3 times estimated profit. That’s about a 25 percent and 40 percent discount, respectively, to the average stock in the S&P 500 Index.

Fiscal prudence hasn’t provided much of a balm. Gilead decreased its share count by 8 percent last year through buybacks and instituted a dividend. Apple returned $17 billion to investors in the last quarter alone. Yet company executives are peppered with impatient questions on new products in development and possible acquisitions. Given records of consistently churning hit products and profit, the lowly valuations of Gilead and Apple present good hedges against investor impatience.


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