Gilead Sciences Inc A Great Opportunity Post Q2 Earnings

  • Genvoya sales go from strength to strength. HIV drug sales reached $3.1 billion in Q2.
  • Hep C sales were poor due to temporary headwinds such as strong competition and limited demand. Epclusa may be the answer here.
  • Gilead's balance sheet is too strong for this company to be a value trap. Strong upside potential from here.

Gilead Sciences (NSDQ:GILD) is on the ropes. Its second quarter earnings did nothing to ease investors fears which resulted in the share price dropping well over 8% by market close on Tuesday the 26th. Despite the company actually beating earnings estimates with its EPS of $3.08, revenues of $7.78 billion came in shy of estimates and well under the $8.24 billion figure in Q2 of 2015. Furthermore, top line guidance for the year got cut to around $30 billion which was the final nail in the coffin for investors to start selling off the stock.

Believe it or not but potential investors are now left with a stock which has an earnings multiple of under 7 which is very rare in this sector. Investors and analysts alike are now debating whether Gilead Sciences is a value play or value trap. I still maintain it is a value play especially when you see the iShares NASDAQ Biotech Index (NSDQ:IBB) rallying over 12% in the last 30 days. Gilead's balance sheet and fundamentals are just too strong for the share price to keep falling indefinitely. It will find a floor soon. Let's discuss my line of thinking.

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Genvoya Leading The Way In HIV Sales Growth

Firstly, though hepatitis C negative sales growth is the elephant in the room at present, HIV sales did better than expected in the second quarter. Top line sales increased by $400 million to reach $3.1 billion with Genvoya especially leading the charge. Sales for Genvoya almost doubled in Q2 ($302 million) which means this drug has been the most successful HIV launch in the last decade. I acknowledge that a lot of the drugs growth has come from former Gilead patients moving up from older more expensive drugs, but this is not the point.

The point is that Genvoya, and to a lesser extent Odefsey & Descovy are the new TAF based drugs which are to take over from the likes of Stribild for example which is coming off patent protection. Bears constantly have pointed out that patent expirations in Gilead's HIV franchise which are due in 2018 and 2021 would seriously dent sales. Presently, I do not see this happening. In fact, Gilead is currently improving its Truvada drug in an attempt to fend off competition from Glaxo's Tivicay drug. If phase 3 trials go as per plan here, Gilead will really be set up to dominate this market from here.

HEP C Sales Are Cyclical And Will Eventually Settle Down

Regarding Hep C sales, Gilead saw sales fall by $900 million to reach $4 billion in Q2 which on the surface looks very disappointing. Sales dropped 33% in the US and 32% in Europe and the management admitted on the conference call tat it did not know when a bottom in this market would be reached. However, I have seen this before especially when markets are in transition. The industry is currently readjusting to lower patient starts and lower pricing.

This means the likes of Solvaldi and Harvoni are suffering at present due to lower priced alternatives and lower demand but I don't see the fundamentals remaining like this. Here is where you have to back Gilead going forward. It has shown already that it can adapt to changing market conditions. Will it acquire or will it develop another drug by itself or is Epclusa the answer? Rumor is rife that it is about to acquire as it only ploughed $1 billion into buybacks in the second quarter. Whichever way it goes, you have to back its track record here.

Balance Sheet Too Strong For This Stock To Go Much lower

Thirdly the company's balance sheet is too strong for this stock to end up being a value trap. When we look at the three mainstays (income, cash and debt), we can see that net income came in at $3.5 billion in Q2, cash on the balance sheet was $24.6 billion and debt $21 billion. For cash to come in ahead of long term debt is a feat in itself. Furthermore the company pays out a dividend yield of 2.32% which means value investors will come calling the lower this stock goes. Remember its payout ratio is only 14% which means strong dividend increases should continue to be on the horizon.

To sum up, Gilead Sciences stock sold off hard the next trading day after it announced its second quarter earnings. However the company's pipeline and fundamentals are too strong for the share price to keep falling. HIV Franchise sales improved meaningfully and Epclusa or an acquisition could be the solution for its struggling Solvaldi & Harvoni sales. The company's balance sheet is too strong for this to be a value trap. Buying around these levels is strongly recommended.

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  • I do not have any business relationship with the companies mentioned in this post.
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