Value Behind the Fear: Gilead Sciences
$GILD Closing Price: $65.59
Despite Q4 2016 top and bottom line earnings beat, Gilead Sciences fell 10.31% over the past two days due to its lower than expected HCV sales guidance. So is it time to give up on this stock?
Certainly not. Since reaching its all time high 20 months ago, Gilead has fallen over 46% due to its declining sales revenue from its HCV franchise. Unfortunately, Gilead has suffered from its own success. Since finding a cure for Hepatitis C through Harvoni, every patient cured is one less available patient in the market. Although Gilead cured millions of patients from HCV, the societal value of this drug was not reflected as positively in its stock price.
Gilead Sciences is now left with $31 billion in cash, HIV franchise, a declining HCV franchise, and a pipeline of drugs in NASH, HBV and plans to enter oncology.
A $32 billion cash pile reflects approximately $22 dollars of the $65 stock price providing the company a comfortable cushion on the downside. With this money Gilead is expected to pay quarterly dividends of $0.52/share and spend another $9B in stock buybacks, reducing the overall float by 120M shares or 10.5% of float. With the remaining $21B it can acquire many of the oncology based biotech companies such as $INCY or even create more leverage and acquire $REGN; boosting Gilead's pipeline, earnings and sales. Gilead is also taxed at an effective tax rate of 25% - 28%, an upcoming tax cut and repatriation can provide Gilead another much needed earnings boost for this company.
Gilead's HIV franchise brought in $15.1 billion in 2016 and is expected to bring in another $15.05 - $15.5B in 2017. The HIV and other antiviral drugs brought in an approximate EPS of $5.20 a share in 2016. Ignoring the HCV franchise entirely, and removing $22 due to the cash position, Gilead would still be trading at a safe multiple of 8.38. Gilead's HIV franchise has been under scrutiny due to an upcoming patent expiry in its TDF based medicines. Since Gilead holds the majority of the anti-retroviral sales, generic competition could certainly hurt its sales, but Gilead's solution is its two new TAF based medicines: Odefsey and Descovy. Although TAF's efficacy is similar to that of TDF's, TAF based medicine cause significantly less kidney and bone damage. This alleviates a significant concern since immunocompromised patients with HIV also receive other medication harming their kidneys. This is in part the reason behind the significant early success of these TAF drugs.
HCV poses a much larger hurdle to cross. Due to the nature of Gilead's drugs, the HCV market declines with every patient cured. So far the majority of the HCV patients have been acute and symptomatic making it easy for physicians to prescribe them to the medication. The majority of the remaining patients are facing chronic and asymptomatic HCV. This makes them significantly harder to diagnose. Gilead's new Epclusa alleviates this problem in many ways. Epclusa is pan-genomic, meaning patients with all the different types of HCV can be prescribed this medication. Epclusa saves medicare on further genotype screening protocols, making it the uncontested leader in the HCV market for these remaining patients. Sales of HCV drugs should keep declining until all the acute patients are treated and will flatten once the treatment of the chronic patients are left. I expect this to happen by the end of 2017.
Gilead's pipeline has a newly approved drug for treating HBV (Vemlidy) and phase 3 trials in NASH. Both these diseases represent huge opportunities for Gilead since there there are a vast number of patients and no reasonable treatment options in either.
In 2017 I expect Gilead to proceed with M&A as well as activist investment into the company. In 2018 I expect the HIV and HBV earnings to kick in and await favorable NASH trial results.
24 mo. Price Target for Gilead Sciences: $105
Disclosure: I am long GILD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.