- Gilead Sciences misses earnings estimates for 2 consecutive quarters. Breaking the long term growth trend
- Market sentiments in play on expectation that Gilead will eventually lose its dominance in Hepatitis C market.
- There is potential in the company as it still holds a high value patent portfolio (USD30 billion) and eight Phase III assets in the pipelines.
- Still generating a lot of cash with USD24 billion cash, cash equivalent and marketable securities
Source: Google Finance (Sep 7, 2016)
1) What Business Gilead Sciences (GILD) Is In
Research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need.
Primary areas of focus include:
- Human immunodeficiency virus (HIV),
- Liver diseases such as chronic hepatitis C virus (HCV) infection and chronic hepatitis B virus (HBV) infection,
2) What Happened to Gilead Sciences (GILD) Recently?
It has been in the news lately and its share prices have been in the downward trend in 2016.
Gilead reported 6% drop in 2Q16. The estimated growth in sales was cut by USD0.5 billion. This was the second time Gilead missed its quarterly forecast.
The company’s principal areas of antiviral products can be viewed as HCV (61%), HIV and other antiviral (33%) and other products (6%)*.
Source: Gilead 2015 Annual Report
Source: Gilead 2Q16 Earnings report
Market sentiment driven by fear of the drop in HCV sales, mainly Harvoni (-23%) could be a sign that Gilead is losing its dominance in hepatitis C. The drop was mainly contributed by aggressive pricing competition from re-entering of Merck in late January and price transparency bill was passed in Vermont also pressured big pharmaceutical companies to justify their pricing practices might pose a threat to Gilead future profit. The other reason would be that these drugs actually cured, not just treated the patient and reduced the target group of patients.
The recently approved HCV drug, Epclusa has a promising early sales and brought in $64 million in 2Q16 in U.S. alone. It was approved by EC on July 8 and is expected to generate $1.8 billion of sales per year.
Gilead is still performing fairly well in HIV/AIDS segment, enjoying 85% of market share, generates $7 billion. Although the patent of some of these drugs (Viread, Atripla and Truvada) are expiring in 2018, the company’s TAF-based drug innovations should be able to close the gap in revenue post Viread, Atripla and Truvada era.
Source: Gilead 2Q16 Financial Report
3) What Will Happen to Its Future?
Gilead revenue tripling between 2013 and 2015 due to successful launch of Sovaldi and Harvoni.
Total sales are forecasted to be around $30 billion this year, the run rate for product sales comes in at between $7.2 and $7.3 billion in Q3 and Q4 of 2016.
The current price of $76 – $78 is a drop of 34%, compared to the 52 weeks high of $117.86, is not justified by the fall in sales of Harvoni (-23%). The company has solid fundamental and sitting on a large pile of cash which can be used to acquire another business to expand its portfolio.
The management of Gilead has always being prudent in when it comes to buying another business. One example being acquisition of Pharmasset for $11 billion in 2012, given the company the recipe to Solvaldi, Harvoni and Epclusa which already generated more than $40 billion sales as of 2Q16.
Gilead’s top executives, all accomplished chemists, were able to quickly recognize the drugs’ potential and fast-tracked FDA approval, getting the drugs into market as short as 2 years, instead of the normal 10~years.
The company’s other blockbusters, such as Viread and Truvada etc., were acquired from research lab or struggling company and turned into cash cows.
Although there is a lot of criticism on Gilead management for losing Medivation deal to Pfizer, it is permissible given the final sale price.
However, in order for Gilead to expand, the company has to look outside of Hep C or to be acquired by bigger Pharmaceutical companies and form synergy while keeping its niche in rare disease drugs development.
My take is to long Gilead for the opportunity of the pipeline and potential growth through acquisition from the $24 billion cash and equivalent. The company consistent dividend payout is an added bonus.
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Research Analyst, Mind Kinesis Value Investing Academy