- Gilead sciences will report its Q3 earnings on Tuesday, 1st November after the market closes.
- Analysts expect Gilead to report an EPS of $2.85 on revenue of $7.44 billion.
- Gilead stock is a solid long term buy, but in the short term, the stock is likely to remain volatile.
It has not been a good year for investors in biotech stocks, especially Gilead Sciences (NSDQ:GILD). Gilead stock has continued to slide on declining sales of the wonder drugs, Harvoni and Sovaldi. The stock has declined more than 30% in the last one year, while the biotech index iShares NASDAQ Biotech Index ETF (NSDQ:IBB) has lost more than 15% in the same period. Many investors will be hoping for a change in the fortunes of the company, when it reports its Q3 earnings on 1st of November. Gilead has a strong balance sheet and solid profit margins, and it's a solid buy. Here's why.
Thorn In The Flesh
Declining sales of Hep C drugs, Haravoni and Sovaldi is the main reason behind the crash in Gilead stock. These two drugs have brought in billions of dollars in revenue over the years. In 2015, these two drugs netted $19.1 billion in revenues, up 54% from $12.4 billion in 2014. But now the company is facing strong competition from AbbVie's (NYSE:ABBV) Viekera and Merck's (NYSE:MRK) Zepatier. The competition has not only impacted Gilead's revenue, it has also eaten into its margins. In the previous quarter, the sales from Hep C drugs declined by 19%, to $4 billion from $4.9 billion in the same quarter last year. Eventually, sales will bottom out, but the question is when? Will it be this quarter? According to a report from Barron's, the HCV sales have improved in the later part of the quarter. To quote the report:
Notably, HCV franchise is seeing some uptick in last 5-6 weeks as NRx (new starts) are tracking slightly better than the beginning of the quarter. In the month of July’16, NRx were light by 12% vs. April’16 (QTD). This has now improved and NRx till 9/16 are only down by 7% QTD over last Q. In the month of August and September (so far), new starts are only down 4% QTD over last Q.
The company believes that HCV is still a lucrative market. According to Gilead, there are more than 3 million Hepatitis C cases in the US alone, of which more than a million are still to be diagnosed. (Also Read: Could The FDA Warning Hurt Gilead Sciences Inc (GILD)?)
New Drugs In The Limelight
The introduction Epclusa has reduced some of the pressure from the HCV segment. Epclusa is the first drug which can be used to treat both Genotype II and Genotype III Hepatitis C cases. And the drug is showing strong growth. Epclusa had reported $63 million in revenue in just one week in Q2. Q3 will be the first full quarter for Epclusa and analysts expect the drug to report strong performance. Analysts estimate Epclusa to report as much as $10 billion in sales in the next one year. To quote Gilead's COO Mr. Kevin B. Young from Q2 earnings call:
Epclusa will be an important treatment option in the U.S. as an estimated 20% to 25% of HCV patients have genotype 2 and genotype 3. And equally across Europe, there are some countries that have up to 30% of patients with genotype 3 alone.
Gilead's HIV drugs are another segment to watch out for. The HIV segment reported 11% sequential growth in the previous quarter and is likely to report strong performance in this quarter as well, largely due to the newly launched tenofovir alafenamide (TAF)-based regimens, Genvoya, Odefsey and Descovy. 'Genvoya' is the most-prescribed single-table regimen for HIV patients since its launch in November last year. Genvoya doubled its revenue on a sequential basis in Q2, with overall revenue coming in at $302 million. However, there is a strong caveat to this growth story. 78% of the Genvoya users are "switches" and 90% of them are from their own drugs "Stribid" and its predecessors.
Another area to watch out for is the commentary regarding Nonalcoholic steatohepatitis (or NASH) products. There is no drug approved as of yet, but Gilead has made strong progress in this area in recent months. Analysts expect the market size of NASH to be around $25 billion by 2025.
Gilead has a strong balance sheet. The company generates billions of dollars in cash every quarter. The company generated almost $5 billion in cash from operations in Q2 alone. In 2015 the company generated $20 billion in cash from operations. In the last 12 months, the company has produced $13 billion in free cash flows. Strong cash flows allow Gilead to return huge amount of capital to the shareholders. In the first half of the year, Gilead has bought back $8.8 billion worth of stock and has paid around $1.7 billion in dividends. Gilead stock currently yields 2.54%.
Gilead is also a highly profitable company. The operating margin (ttm) stands at 62.3%, while the net margin is just above 50%. And while Gilead's return on total assets is 29%, the use of leverage allows the company to report 99% in return on equity. And considering that the cost of equity is between 7% and 8%, the company is generating huge value for shareholders. (Also Read: Gilead Sciences Inc Stock Has Huge Upside Potential)
Analysts estimate Gilead to report an EPS of $2.85 on revenues of $7.44billion. These estimates represent a 11.6% decline in earnings and a 10.4% decline in revenues from the same quarter last year. As discussed, the decline is largely because of the slowdown in its Hep C segment. And while Gilead has delivered an EPS beat in 3 of the last four quarters, the company has missed on revenues in last two quarters. Investors will be keenly watching the revenue figures of this quarter. A revenue beat will go a long way in assuaging investors concerns.
Gilead stock has declined by more than 25% this year, and a miss on the revenue front will put the stock under further pressure while strong revenues will send the stock soaring. Analysts estimate Gilead to report an EPS of $2.85 on revenues of $7.44billion. Investors should also watch out for any acquisition related announcements. Gilead remains a solid long-term buy with strong cash flows and solid profit margins. With a 1-year price target of $101, the stock has more than 33% upside. Add to that the dividend yield of 2.5%, you are looking at a potential return or around 35%. Long-term investors should use any after earnings pullback to get into the stock.