Full Recovery In Sight For Gilead Stock?

  • Gilead's Q4 2015 earnings offered a new perspective on the timeline for Gilead stock's fully recovery.
  • Gilead's accelerated $5 billion share buyback program will significantly increase EPS, ROA & ROE. This will be a catalyst for a stellar Q1 2016 performance.
  • Gilead has only reached ~13% of the market. Because AbbVie is losing ground, I believe there is more than enough room for Merck's Zepatier without hurting Gilead's bottom line.

Gilead Sciences (NASDAQ:GILD) Q4 2015 earnings offered a possible timeline for Gilead stock to fully recover. In this article, I will address key catalysts from the earnings call that will be critical for Gilead stock price upside in the short-term. These short-term catalysts will also be critical in shedding more light on Gilead's fundamentals and long-term prospects.

The Next Three Months Are Critical

  • The accelerated $5 billion share buyback program will reduce outstanding shares by at least 4.2%. This will significantly increase EPS, ROA & ROE. These increases will make Gilead's Q1 2016 quarter an impressive one.

According to Robin L. Washington, Executive Vice President and CFO of Gilead Sciences, the board has announced the "utilization of $5 billion of the current program to enter into an accelerated share repurchase agreement, which is expected to be completed in the next three months. This is in addition to the on-going open market share repurchase that has continued under the current share repurchase program since January of this year."

Gilead Sciences has 1.44 billion shares outstanding. With its current stock price of $82.71/share, the $5 billion share repurchase plan implies that Gilead is planning to buyback ~4.2% of its outstanding shares in the next three months. This accelerated stock repurchase program will bolster investor confidence in Gilead stock as it reflects Gilead's board and management's view that the stock has bottomed out. But it also has an additional effect of signaling that management expects future cash flows to increase.

This accelerated buyback program will substantially improve Gilead's financial ratios. It is likely that Gilead might be carrying out the accelerated share buyback program not for improving financial ratios since they are already strong, but because Gilead stock has bottomed and this is the best time to buy. But buybacks have other unintended consequences. The $5 billion buyback program will help reduce the assets on the balance sheet (cash is an asset). This will increase Gilead Sciences' ROA and ROE because assets will be reduced and because there will be less outstanding equity. This will just be in time for Gilead's Q1 2016 earnings report date which is estimated between April 28 and May 2.

Room For Other Players

  • Gilead has only reached ~13% of the market. Because AbbVie is losing ground, I believe there is more than enough room for Merck's  Zepatier without hurting Gilead's bottom line.

Management's resolve to take swift actions in case of new entrants in the market will be tested again with Merck (NYSE:MRK) in the game. Gilead responded very well when AbbVie (NYSE:ABBV) Viekira Pak got the FDA approval and signed an exclusive deal with Express Scripts just days after its drug was approved. Gilead Sciences countered AbbVie's move by signing an exclusive deal with CVS Health Corporation within a month. Therefore, the next month or so will be critical for investors as we watch Merck's next step and how Gilead will react to that step.

But AbbVie's Viekira Pak and Technivie are no longer material competitors. This is because the Food and Drug Administration (FDA) has warned that "hepatitis C treatments Viekira Pak and Technivie can cause serious liver injury mostly in patients with underlying advanced liver disease." This warning is likely to make most PBM's stay away from AbbVie's Viekira Pak and Technivie.

Therefore, there is room for another competitor without affecting Gilead Sciences' bottom line. During Gilead's Q4 2015 Earnings Call, Paul R. Carter, Executive Vice President of Commercial Operations said that,"even with nearly 400,000 patients treated since the launch of Sovaldi, there are more than 3 million HCV-infected individuals in the U.S. who have yet to be treated, approximately half of whom are diagnosed according to recent CDC data." Gilead has only reached ~13% of the 3 million HCV-infected individuals in the U.S. Since the product has only ~13% of the market, Merck can comfortably penetrate the market without affecting Gilead Sciences' bottom line in any material way.

Merck has yet to show how they plan to disrupt the market except for their low cost competitive strategy. However, I believe that because AbbVie is losing ground and that Gilead Sciences' Solvadi and Harvoni are far from saturating the market, there is room for another competitor without hurting either company's bottom lines.

The Political Headwind

  • The political headwind will decline in 90 days. As the top presidential contenders emerge and their policies are fully comprehended, the political headwind will stabilize.

The Iowa caucus gave the top three republicans the needed momentum and tightened the race between the two democrats. After the New Hampshire Primary on the ninth of this month, South Carolina and the Nevada caucuses will follow on the 20th. But after Super Tuesday in March, people will have a clear idea of who the nominees will be in both parties. The nominees will have to lay out concrete plans of what they intend to do once in office. These plans will help stabilize the political risk in drug companies like Gilead because the market will be able to fully price the risks in.

As the presidential election draws near, the candidates will need to give more elaborate and clear plans backing their statements. These statements will be enough to settle the growing uncertainty over drug companies pricing strategies. For instance, the market can easily adjust and price in the potential effects from Merck's Zepatier, the political headwinds from the presidential candidates are on-going threats. Once these threats decline, Gilead stock price should have an easy time bouncing back.

The Way Forward For Drug Companies

Drug companies will start cutting middlemen to settle these sudden political headline risks without risking their bottom line. A strategy for better pricing exists and was exemplified by Valeant Pharmaceuticals (NYSE:VRX) when the company was pushed to the corner late last year. Valeant signed a 20-year deal with Walgreen's Boots Alliance. The deal allowed Walgreen's to become Valeant's distributor replacing its Philidor Rx Services relationship. The deal offered Valeant the option to increase patient access, increase revenues through volumes and grow margins by cutting off middlemen.

Gilead has enough room to grow margins through turnover even if it decides to lower prices. This is because Gilead can increase volume and allow more patients to be treated at a lower per-patient cost. More so, there are other exciting opportunities in Gilead Sciences pipeline that can cause a further boost to the stock price before the stipulated potential timeline. Beside, Gilead has enough cash to pursue major accretive acquisitions and other pipeline investments (both organic and inorganic) that have potential to substantially increase long-term shareholder value.

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