- Despite declining HCV sales, Gilead still has a wide economic moat meaning it should be able to withstand current headwinds.
- Hepatitis C sales fell in Q2 of this year because of the huge amount of patients starting treatment in the quarter of 12 months prior.
- If products such as bictegravir and simtuzumab get approved, they would go a long way towards stemming market share losses.
What a year it has already been for Gilead Sciences, Inc. (NASDAQ:GILD). The stock is down over 20% year to date and is struggling to stay above $80 a share. The company's second quarter earnings didn't help. Hepatitis C revenue per patient is definitely falling. Since this area is the main source of revenue for the company, the market viewed it as a big negative and the stock sold off as a result. However, does a bad 12 month period seal a company's fate? I beg to differ. Despite its near term headwinds Gilead is still the dominant player in hepatitis C. Furthermore, sales of HIV products grew by double digits in the company's latest quarter which actually surprised many analysts.
However, recent share price action has brought out the bears. Stiff competition from Merck in the hepatitis C space along with an unproven pipeline have been the reasons touted for more declines in the share price over the next few quarters. However, I don't see the company's fundamentals as being this cut and dry. First of all, Gilead has an excellent balance sheet and its pipeline has the potential to transform the company if certain drugs can win approval. Therefore let's discuss Gilead's wide moat and some of the near term events and see if these factors can ultimately lead the share price back up towards $100 a share. The next 6 months will, in my opinion, dictate the direction of Gilead's share price going forward, so investors need to stay alert.
Sales May Be Stagnating But Margins Remain Elevated
Despite Gilead's near term woes, the company's gross margins are at an all time high, currently boasting a twelve month trailing average of 87.1%. Top line saw a huge jump in 2015 going from $24.89 billion in 2014 to $32.63 billion. To me, it isn't a surprise that we are going to see a consolidation year in 2016 with top line guidance being reduced to around the $30 billion mark.
The company's track record and expertise are probably the prime reasons why you have to back the management, going forward. We have already seen how a perceived expensive acquisition at the time (Pharmasset back in 2012) turned into a master stroke, as sales have almost quadrupled since then. Gilead saw the safety characteristics of Sovaldi and acted swiftly.
Now the question is, can the company reinvent itself again by innovating or acquiring another company. Gilead certainly has the balance sheet to do it. Gilead reported $24.6 billion in cash last quarter and $15.53 billion in equity. Remember Gilead is a premium brand and, generally, has the most expensive drugs. It's objective is to launch better products that can charge a premium to boost sales once more. Analysts are projecting sales of less that $30 billion in 2017. I think they will be surprised.
Epclusa Could Be A Game Changer In HCV
With regards to Sovaldi and Harvoni, I refuse to believe sales will continue to decline. The reason why Harvoni dropped by 29% was because of weaker demand, shorter treatment times and too much of a price difference between this drug and its competitors. The main reason why I'm still bullish on this space is because there are literally millions of people yet to be diagnosed, so demand will remain strong for many years to come. Gilead's FDA approved drug "Epclusa" also has potential against the likes of Merck's Zepatier. It will be priced cheaper than Harvoni and also will be the first to treat adults with all genotypes. Therefore, I believe the combination of more alternatives in this space along with rising demand should put a floor under Gilead's sales in the near term. In fact, management cited recently that screening volumes were increasing which should give way to more sales.
Pipeline Of Drugs In Clinical Trials Remain Strong
In the end, Gilead's success is going to be based on how many of its pipeline drugs will pass phase 3 clinical trials. Questions have been raised about the quality of the pipeline which I don't agree with. Firstly, the company has a real potential blockbuster with Simtuzumab which currently is in phase 2 of clinical testing. Analysts believe this drug could do up to $12 billion in sales if approved, which would really move the share price. Other catalysts are its integrase inhibitor option in the HIV space which currently is undergoing phase 3 trials. If this gets approved, then Gilead should be able to gain back market share from Glaxo whose Tivicay and Triumeq drugs continue to perform very well. Patience is required from investors here as we have seen that when new drugs come onto the scene, that respective sector can change on a dime.
To sum up, I believe Gilead stock price will bounce back meaningfully in the years to come due to its wide economic moat and strong pipeline. The demand is there in hepatitis C and HIV. Therefore, Gilead needs to come up with a solution to meet that demand as it has done in the past. This could be through acquisitions or the development of its own drugs.