Friday, March 7, 2014

Gilead Sciences: Looking for Answers, Finding Silence

The trading day started out like any other for Gilead Sciences (GILD).

Deutsche Bank’s Robyn Karnauskas and Alethia Young released a report yesterday reiterating Gilead’s Buy rating and noting that the market didn’t seem to be giving it credit “for success on their future pipeline.” Gilead also announced last night that it would sell $4 billion in debt, an offering that Maxim’s Jason Kolbert called “very positive and accretive to Gilead.” Even Bernstein’s Geoffrey Porges and team offered positive comments on Gilead, suggesting that Gilead has “a number of viable options in development to sustain revenue, cash flow and growth, underscored by their commitment to building the “third leg of the stool” with their oncology franchise, and their early stage pipeline and potential strategic bolt-on acquisitions.”

Just after the open, Gilead was up 0.7%. Then the selling started, slowly at first. By noon it was down 0.5%; by 1 p.m. it was off 2.3%. By 2:34 p.m., Gilead was off 4.1% at $79.49, and the iShares NASDAQ Biotechnology Index (IBB) had dropped 2.5% to $261.60, despite Biogen Idec (BIIB) getting upgraded by BMO Capital Markets and Barclays touting Alexion Pharmaceuticals (ALXN). This chart shows the damage over the course of the day.

So what caused the plunge? No one really knows. This piece from Bespoke Investment Group, which speculates about the potential for a biotech bubble, could be at fault. Or it could be something happened to Gilead that hasn’t made it’s way into view yet. Or it could be nothing at all. ISI Group’s Mark Schoenebaum explains:

I’ve been asked dozens of times in past hour why biotech is selling off. The honest answer is I really have no explanation.

In general, my thoughts on the biotech sector have been that a massive sell-off is unlikely, but that a more modest correction is, in theory possible, since all the stocks now trade above conservative DCF analyses. However, PE multiples are still undemanding and suggest that if a sustained sell off (not just a single day move) were to occur, it’s unlikely to be dramatic or sustained.

If nothing else, the day just got a little more exciting.

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