Are GILD Stock Investors Taking HCV Sales Concerns Too Seriously?
Up to now, I have been very vocal with respect to my bullish opinion regarding Gilead Sciences (NSDQ:GILD). Many investors and analysts alike have been trying to pick a bottom in the stock this year, but the stock stubbornly continues to trade below $75 a share. Worrying downward trends with respect to the company's HCV division remain the dominant theme among investors. Gilead's HCV division slipped by a whopping 31% last quarter, which resulted in HCV sales of $3.3 billion, which was well below expectation. The stock is now down almost 40% from its high back in June 2015. At present, investors simply can't see a swift turnaround in the company's quarterly sales. This has resulted in the company now trading with a price-to-earnings ratio of 6.94 which is ludicrously cheap for a company with a market cap of around $100 billion. Nevertheless, the question still remains whether the stock is going lower.
Why GILD Stock Is A Value Play Right Now
Value investors have shown up en masse as of late and with good reason. In a nutshell, Gilead has increased its revenues by a factor of 10 over the past decade whereas it's debt as a percentage of its equity has only doubled. Gross margins remain above 85% which is the main reason why this company's balance sheet is so strong. The recently incorporated dividend yield of 2.51% still only results in a payout ratio of 16.7% on a trailing 12-month average. Furthermore, the company's price-to-sales ratio and the price-to-cash-flow ratio of 3.3 & 5.8 respectively fall well below industry average numbers as well as Gilead's historic averages. Finally, the company's present position in HIV where its new TAF regimens are beating expectations and are patent protected well beyond 2020, has to be seen as another strong competitive advantage. The one outlier is whether the company can stabilize its HCV sales as the market will need to see this before the share price can truly rally.
More Screening Will Ensure Patient Starts Remain Robust
Analysts are basically pricing in negative growth in the near-term and flat earnings growth over the next five years. The reasoning behind these projections is because there is a plethora of quality drugs in the HCV space at present which have the potential to cure patients at a much faster clip than before. Furthermore, fierce pricing competition, especially from the likes of Merck's Zepatier, has resulted in Gilead having to offer larger discounts to keep its strong market share in this area. Initially, there was a whopping $40,000 difference between Merck's HCV treatment plan and Gilead's Harvoni, and this difference definitely led to lower sales in recent quarters. However, what the bears are missing here is that Gilead is the only company with substantial treatment plans across all genotypes. Merck’s Zepatier, for example, is only approved for genotypes 1&4, and although it is much cheaper, it's restrictions definitely come against it on a general scale.
Epclusa Will Continue To Gain Market Share
This is where Epclusa has the potential to steal market share from its competitors due to its approval across all genotype HCV infections. The drug is cheaper than Sovaldi and it presently being used for genotype 2 & 3 patients because of limited competition. Epclusa brought in $640 million in its first full quarter in Q3 but I see meaningful potential here for a few reasons. Firstly because it can be used across the whole patient range, the drug has been added to medicare and medicaid programs which mean it will be the preferred go-to option for many insurance policy holders. Secondly, initial results state that the drug is achieving higher cure percentages, which means at present, its 12-week treatment plan is the most effective in the HCV space. Combine this with a cheaper price (especially against genotype 3 competition) and it becomes apparent that Epclusa should continue to steal market share from its competitors.
To sum up, the market has basically written off a stabilization in HCV sales for a number of years. Many investors believe that heightened competition from the likes of Merck will cripple Gilead's margins over time. However, Gilead will continue to concentrate on quality, which over time will result in more sales. Buyers will always pay a premium for quality in every market and this is no different. This is why I would back the company, especially considering its track record when it acquired Sovaldi by buying out Pharmasset in 2012.
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