- After achieving excellent success in the treatment of all HCV genotypes patients, Gilead is changing its R&D focus to other areas.
- Gilead seeks new revolutionary drugs for diseases that do not have a cure until now.
- The average target price from top analysts is at $99, an upside of 29.7% from its November 15 price, which appears reasonable.
Gilead Sciences (NSDQ:GILD) has been dedicating large capital for Research and Development(R&D) in the last few years. In fact, its R&D expenses for the trailing twelve months of $4,647 million have been the highest among all biotechnology companies, as shown in the table below. However, currently, Gilead is changing its research and development focus from hepatitis C drugs to other areas. Here's why the developments in this space may drive Gilead's profits and stock higher.
After achieving excellent results in the treatment of patients across all six HCV genotypes by introducing Epclusa, and continuing to lead the HCV drugs market, Gilead seeks new revolutionary drugs for diseases that do not have a cure until now. Achieving such drugs will increase the company's revenue and profits making it a high growth company again.
At the earnings call on November 1st , Norbert Bischofberger, Gilead EVP Research and Development & Chief Scientific Officer, explained that the company will focus its attention on development programs in NASH, inflammation, oncology and HIV now.
The development of drugs for NASH disease is a very promising area for the company. NASH is a common liver disease, which has no cure right now. According to the company, NASH is an understudied but increasingly prevalent disease. The NASH market is quite large, about 15 million people in the United States are suffering from the disease and this number is growing. In Europe, the prevalence of NASH is approximately 5% of the population. Gilead currently has four promising drug components in phase 2 study.
Source: Third Quarter 2016 Earnings Slides
Gilead is also making considerable progress in HIV medications. The company is looking for opportunities to cure HIV patients completely by clearing out the viral reservoir from their bodies. Also, Gilead is bringing new options to people with HIV who after many years of treatment are suffering side effects, and now need to change their treatment.
Latest Quarter Results
On November 01, Gilead Sciences reported its third quarter 2016 financial results, which missed earnings per share expectations by $0.11 (3.8%). GILD's revenues of $7.50 billion for the quarter were better than the consensus estimate of $7.46 billion. The company showed earnings per share surprise in nine of its last twelve five quarters, as shown in the table below.
In the report, Gilead reiterated its full year 2016 guidance. According to the company, revenues are expected to be between $29.5 billion to $30 billion.
Sales of Gilead’s blockbuster hepatitis C drugs Harvoni, Sovaldi and the new drug Epclusa, which was launched in the United States and Europe in June and July 2016, fell 16.6% compared to the previous quarter and 30.7% year-over-year to $3,325 million. The decline in Gilead’s HCV revenue has been mostly due to lower patient starts for Harvoni and lower revenues per patient, and the deep discount the company had to offer to maintain its high market share due to the competition from AbbVie's (NYSE:ABBV) HCV drug Viekira, and Merck's (NYSE:MRK) HCV drug Zepatier.
Source: company reports
On the brighter side, total HIV and other antiviral product sales increased 12% compared to the previous quarter and 21.1% YoY to $3,516 million. The sales improvement was primarily due to increase in sales of Gilead's newer Tenofovir Alafenamide (TAF) based products which are better-tolerated than the former TDF-based drugs. Genvoya, the first of these new HIV drugs achieved sales of $461 million in the third quarter an increase of 52.6% from sales of $302 million in the second quarter. In Q1, Gilead started selling the drug after its approval in November 2015, sales of Genvoya were $158 million. It is worth noting that it was the first time after many quarters that HIV and other antiviral product sales were higher than hepatitis C drugs sales.
Total HIV & Other Antiviral Product Sales
Source: Third Quarter 2016 Earnings Slides
Gilead Stock Performance
GILD's stock moved 6.0% up on the first trading day after Donald Trump was elected president, as investors were relieved of the fear of drug price control if Hillary Clinton was elected. However, since then, the stock price has fallen 2.6%. Since the beginning of the year, GILD's stock is down 23.9% while the S&P 500 Index has moved up by 5.9%, and the Nasdaq Composite Index has gained 4.6%. However, since the beginning of 2012, GILD's stock has gained an astounding 283%. In this period, the S&P 500 Index has increased only by 72.1%, and the Nasdaq Composite Index has risen 101%. According to TipRanks, the average target price offered by top analysts is at $99, which represents an upside of 29.7% from its November 15 close price, which appears reasonable, in my opinion.
As I see it, GILD's stock is considerably undervalued. Gilead's trailing P/E is very low at 7.07, and its forward P/E is also very low at 7.05 compared to industry. The price to cash flow ratio is very low at 6.31, and the Enterprise Value/EBITDA ratio at 5.76 is very low as well.
After achieving excellent treatment options for patients across all six HCV genotypes, Gilead is changing its research and development focus from hepatitis C drugs to other areas. The company seeks new revolutionary drugs for diseases that do not have a cure until now. Achieving such drugs will increase the company's revenue and profits making it a high growth company again. Considering Gilead's compelling valuation, its stock is significantly undervalued in my opinion. Furthermore, the company generates strong free cash flows and returns substantial capital to its shareholders through stock buybacks and dividend payments currently yielding 2.46%. The average target price offered by top analysts is at $99, which represents an upside of 29.7% from its November 15 close price, which appears reasonable, in my opinion.