4 Reasons Gilead Sciences Should be in Your Portfolio

Companies in the health care sector are popular among investors due to the steady demand for health care services worldwide and its strong presence in the global economy. Gilead Sciences is the largest biotech company by market cap as of Nov. 10, 2015. The success of several of its drugs has helped deliver strong growth on the company's top and bottom lines, but there are several additional reasons to consider adding Gilead Sciences as a core holding in a portfolio.

Strong Revenue and Cash Flow Growth

Gilead is currently on pace to deliver 29% year-over-year revenue growth and total revenues over $32 billion in 2015. Additionally, the company's ability to generate free cash flow is impressive. Free cash flow is how much operating cash flow remains after a company reinvests in itself through capital expenditure. Biotechs often have higher CapEx figures due to the cost of research and development (R&D), so delivering solid free cash flow can be challenging. Gilead has consistently generated approximately $3 billion per year in free cash flow, and that number should be higher in 2015.

International Growth

Sovaldi and Harvoni have delivered strong sequential growth in the United States but overseas is where the biggest growth potential remains. Year-over-year revenue growth in Europe was 21%, while sales in other international markets nearly tripled. Japan may hold the greatest potential, as the company only recently began penetrating this densely populated area. Japan's hepatitis C infected population has been estimated at over 1 million people, further demonstrating the drugs' potential once they become widely available.

A Clearer Path in Japan

Further evidence of the potential of growth in Japan is the relative lack of competition in the area. Companies such as Johnson & Johnson and AbbVie have attempted to deliver their own HCV drugs with limited success due to strong side effects and poor results in patients. The broad success of Gilead's HCV drugs, thanks to high cure rates and mild side effects, could meet little resistance in the larger markets of India and Japan.

Valuation

For all of its future growth potential, Gilead Sciences remains very inexpensively valued. The stock's forward price/earnings (P/E) ratio of 9 as of Nov. 10, 2015 compares very favorably to the biotechnology sector's P/E ratio of 22 and the Standard & Poor's (S&P) 500 index's ratio of 18.

The company's operating margin of 68% and profit margin of 54% as of Nov. 11, 2015 outpace those of large-cap biotech peers, such as Biogen and Amgen.

Conclusion

Some investors may be scared off by the perceived risk involved with investing in biotech and pharmaceutical companies. However, the size and success of Gilead demonstrates that these risks can be minimized.

Gilead benefits from significant factors that make the stock appropriate for most investor portfolios. The health care sector is a staple of the global economy. The demand for health care services and medicines will remain steady and are likely to grow over time as population aging progresses. It also benefits from providing leading and successful drugs for diseases with a great need for solutions. This success, coupled with a wide array of new drugs in development and progressing through clinical trials, suggests future growth potential.

These factors make Gilead Sciences stock an appropriate choice for most portfolios, including those of retirees and young investors.