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NEW YORK (Reuters) - Shares of Gilead Sciences Inc are languishing over concerns about the U.S. biotechnology company's declining hepatitis C drugs and profit outlook, but some value investors sense an opportunity with shares at extremely cheap levels.
At around $72, the once-high-flying shares have lost about 40 percent of their value since reaching all-time records in mid 2015.
On a price-to-earnings basis, commonly used to value stocks, Gilead shares are trading under 7 times earnings estimates for the next 12 months.
That lowly valuation is more similar to automakers GM and Ford, with tepid growth rates, than to large U.S. pharmaceutical and biotech companies, which have P/Es above 10.
Large-cap growth funds have been shedding Gilead holdings in recent months, according to Morningstar, while large-cap value funds have been adding to them, drawn by the rock-bottom P/E ratio.
One value investor, New York-based Matrix Asset Advisors, has been adding "pretty actively" to its Gilead position, said Chief Investment Officer David Katz.
"Once the market’s mindset changes from 'this company is in a secular decline' to 'this company has a very strong earnings base and good long-term earnings possibility,' that it’s easy to go from 6-and-a-1/2 times earnings to 9 times earnings," Katz said.
"And if you do that, you’re talking about a vastly higher stock price."
Gilead's fourth-quarter report on Tuesday will be the next chance to change Wall Street's mindset. Its hepatitis C medicine sales fell 19 percent to $11.6 billion in the first nine months of 2016, after the initial wave of patients was treated and competition emerged.
Gilead's hepatitis C drugs Sovaldi and Harvoni revolutionized treatment of the serious liver disease. In the process, Gilead's sales tripled to nearly $33 billion from 2013 to 2015. Shares soared from $20 to $120 from the end of 2011 to June 2015.
But amid uncertainty about the hepatitis C market, Gilead endured setbacks to its research pipeline and disappointing financial results last year. Analysts expect profit to fall by about 7 percent in 2017 and 4 percent in 2018, according to Thomson Reuters data.
Over the past year, Gilead's 15-percent decline has lagged other S&P 500 biotechs and the Nasdaq Biotechnology index. The sector recently has been pressured by President Donald Trump's criticism about high drug prices.
"People only want to pay a premium multiple for a rising growth rate not a falling growth rate," said Jason Kolbert, head of healthcare research at Maxim Group. "So, even though the fundamentals of Gilead are great ... all people see is the slowing growth rate, what’s next?"
Many investors hope Gilead will strike an acquisition to help restore growth.
Gilead is using resources in ways that could appeal to value investors. It spent $10 billion to buy back stock in the first nine months of 2016, while its dividend yields 2.6 percent, slightly trailing yields offered by Merck and Eli Lilly shares.
Reporting by Lewis Krauskopf; Editing by Nick Zieminski