Cash In Now on the Biotech Winner That Has Wall Street Fooled

5 | By Michael A. Robinson

Today I want to reintroduce you to a stock that Wall Street has been pricing as though it were dead money.

This biotech company recently filed a stellar earnings report. But those earnings were slightly off analyst expectations, and the share price dipped – making this is yet another stock that sells off after a slight miss, a dispiriting trend.

But that’s okay. Wall Street’s ignorance gives us an entry point the likes of which we probably won’t see again for years.

Now I’m going to show you how Wall Street got it wrong – and why today’s recommendation is actually a huge profit opportunity. And we’re going to pick the stock up using a strategy perfect for today’s market conditions.

Let’s take a look…

Missing the Signals

According to this company’s third-quarter earnings report, the biotech’s blockbuster drug, one of the most successful pharmaceuticals ever, is quickly losing steam less than a year after its debut.

That may be true, but here’s what Wall Street missed.

Those sales are slowing down for a simple but lucrative reason. The company is set to release a new drug that will soon replace this blockbuster – and that may do even better.

On Oct. 28, Gilead Sciences Inc. (Nasdaq: GILD) said sales of hepatitis C treatment Sovaldi fell by 20% from the second to third quarter. Analysts called for sales of $2.93 billion but they came in 4.4% short at $2.8 billion.

The company reported adjusted earnings per share of $1.84. That missed the Street’s consensus estimate of $1.92 by almost the same amount as the shortfall in Sovaldi sales.

And the arrival of Gilead’s new drug is not the only signal Wall Street missed.

First, Gilead had blowout earnings for the period – they soared a stunning 254%.

Second, Sovaldi is almost certainly going to go down in history as one of the more successful drugs ever launched. In roughly 10 months, it racked up sales of nearly $8.7 billion treating 117,000 patients.

Just One “Hiccup”

And then there’s that new hepatitis C treatment.

Less than three weeks before the earnings announcement, Gilead received U.S. Food and Drug Administration approval for Harvoni. This compound combines Sovaldi with other ingredients. And that means patients will need to take only that one drug over a course of 12 weeks of therapy.

A round of treatment with Harvoni costs $94,500, but it is much more convenient and may also prove to be more effective than Sovaldi.

Now, here’s why Sovaldi sales slowed down when Harvoni’s FDA approval became imminent.

As typically happens with impending new drugs, many doctors held off prescribing Sovaldi in cases where patients were healthy enough to wait for Harvoni’s release.

In other words, the shift from one drug to another caused a temporary hiccup for Gilead.

The Sovaldi Story

Of course, we know all about Sovaldi. This breakthrough drug has certainly been controversial.

Last March, several Democratic members of the U.S. House of Representatives wrote an angry letter to Gilead complaining about Sovaldi’s high cost – $84,000 for a full treatment, which doesn’t include the price of other drugs that must be taken in combination with Sovaldi.

Yes, that’s expensive. On the other hand, Sovaldi is 90% effective and has fewer side effects than competing compounds.

More to the point, Sovaldi helps hepatitis C patients avoid a liver transplant, a complex procedure that costs a minimum of $250,000 and also requires the use of anti-organ-rejection drugs.

With hepatitis C, Gilead is addressing a huge market.

According to the Hepatitis Foundation International advocacy group, 3.2 million Americans suffer from a chronic version of hepatitis C that can make them incredibly ill. More than 150 million people globally are infected with the virus that causes the blood-borne disease.

Fact is, Sovaldi and Gilead’s 17 other best-selling pharmaceuticals (AmBisome and Tamiflu among them) make it a company with sterling financials. It has operating margins of 58% and earns nearly 75% on stockholders’ equity. Last year, it brought in more than $7.8 billion in free cash flow.

Trading at $100 a share, GILD still offers plenty of upside. I often use the price/earnings to growth (PEG) ratio to put value a company.

A stock has a “fair value” price if it has PEG ratio of 1. Gilead’s ratio is nearly half that – at 0.53.

That’s just one of the reasons Gilead still has room to run. And I want to give you a great strategy for taking advantage of this opportunity in a way that adds to your long-terms profits.

Cowboy Up

We’re doing the Cowboy Split.

As I showed you last week, this tactic can be a very effective tool, especially in like this, where Gilead is oversold.

The Cowboy Split works like this: You buy a portion of Gilead right now at the market. Then, you put in a lowball limit order to buy another tranche at a discount.

That way, if the stock dips again during its period of weakness, you add to your position in a way that can greatly increase your profits.

Let’s say you invest half your standard amount in Gilead at roughly $100 a share. If you were to put in a lowball limit order at a 15% discount, you get the second tranche at $85 a share.

Once the stock returns to its recent intraday high of roughly $116, you’ll earn 16% on your original entry. But that second portion would have profits of 36.5%.

Your cumulative gains would be 26.25% (16 + 36.5 รท 2 = 26.25). That’s 64% more than you would have made had you put in a full order at market.

I use the Cowboy Split strategy regularly. Typically, I suggest splitting the buy into two tranches, with a lowball limit order for the second half at a 20% discount.

But with Gilead, you should do it slightly differently. Split your order into three buys. The first would be for one-half at market.

Then, split the rest into two equal tranches. Because I’m so optimistic about Gilead, I suggest you put in a lowball limit order at a 15% discount with no stop loss.

I wouldn’t set a price for the third order until after the second tranche fills. This approach gives you a chance to monitor the stock over several trading sessions.

That way you get a good feel for what looks like critical support – the price level at which a stock has trouble falling below. That’s the price I would use for my third entry point.

The Cowboy Split is the best way to scoop up winners like Gilead. When Wall Street freaks out, we keep calm and put extra money in our pockets.

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5 Responses to Cash In Now on the Biotech Winner That Has Wall Street Fooled

    • n desai says:

      I have sold puts many times on stocks I want to own. However once in a while it back fires, Good
      way to go as long as you put cash on one side just in case

  1. Robert Sim says:

    What are your thoughts on ABBV’s claim to a patent on the Harvoni combination. Is this what is causing the current weakness in GILD?

  2. Frank Wm. Ballou says:

    Selling puts on a certain date at market, if exercised, does result in cost below that of shares purchased at market on the certain day. If not exercised, you will retain the premium but miss out on gains of the underlying asset. If your objective is to purchase shares, you might elevate the strike price to increase probability that the contract will be exercised. This choice produces less final differential than selling puts at market.

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