- Gilead is currently suffering from investor apprehension about Harvoni.
- With a huge pipeline in place, is this kind of stock price hammering justified?
- What are the strengths that Gilead can depend on, and is this still a good investment?
I think Gilead Sciences, Inc. (NASDAQ:GILD) needs to be vindicated after being hammered by investors for more than a year now. Within the top ten pharma companies, Gilead seems to be the only one that’s trading at the sub-10 price to earnings multiple levels. Despite generating quarterly revenues of nearly $8 billion, Gilead still has one of the lowest valuations in its peer group.
All of this is in spite of the fact that the company itself has shown rapid growth over the past ten years, taking revenues from just over $3 billion to over $32 billion during that time. With such a low forward P/E (7.02 at the time of writing this article), it’s clear that Mr. Market is not expecting a growth spurt anytime soon. In fact, given their current ratios, the real expectation seems to be a revenue freefall rather than growth.
Why is the Market Reacting This Way?
In the first six months of this year, Gilead brought in $15.332 billion in sales compared to $15.531 billion in the same period last year. Sales during the second quarter dropped sharply by 5.85% compared to last year, mainly due to their blockbuster drug Harvoni that led the sales decline, dropping from $7.181 billion in the first half of last year to $5.581 billion this year. Except for Harvoni, all other products saw an increase in sales. However, Harvoni accounted for nearly 36% of their total sales in the first six months of the current fiscal.
Normally, that wouldn’t pose a major problem. However, Harvoni is not the only molecule used to treat hepatitis. Merck and AbbVie have equally effective treatments for hepatitis, and Merck’s new solution is actually 30% cheaper than its rivals and comes in the form of a once-daily pill.
So there’s pressure on sales as well as pricing on both of their star performing drugs despite strong sales over the past quarter, and that’s the real reason for investor fear.
Share Buybacks Are Not Helping
By the end of the second quarter, Gilead’s financial position didn’t change much. The company spent $9 billion in share buybacks in the first half of this year, an amount that would have been well spent had they actually pushed for an acquisition to bolster their revenue stream. Instead, Gilead thought a share buyback program would at least provide some support to their sliding stock price. But, unfortunately, that tactic didn't’ work and the stock is down 21.28% since the start of this year.
“We continue to return capital to our shareholders through dividends and share repurchases. During the second quarter, we repurchased 10.5 million shares for $1 billion under the $12 billion 2016 share repurchase program. And we received an additional 8.1 million shares in April 2016 from the final settlement of the accelerated share repurchase program announced in February 2016. The total share repurchases in the first half of the year were 98.2 million at a cost of $9 billion. As previously communicated, we anticipated share repurchases in the second half of 2016 to be lower than the first half of 2016 as we focus our capital allocation on advancing our R&D opportunities.”
- Gilead Q2 Earnings Call.
Gilead Has Strong Cash Position
The good news for the company is that they are still sitting on a pile of cash, which they can use to buy a few products. In May this year, Bloomberg reported that Gilead is in the market hunting for new deals.
“It’s time for us to go out and do important deals,” Milligan, who became chief executive officer in March, said in an interview at Gilead’s headquarters in Foster City, California. “We need some other assets that can bolster our pipeline.”
The company is not new to acquisitions, no Pharma company of this size can ever be. Gilead’s second biggest seller, the hepatitis C drug Sovaldi that brought in $2.63 billion in revenues in the first half of this year accounting for 17.2% of their total sales, was not an in-house product. Gilead paid $11 billion in 2011 to buy Pharmasset, which brought Sovaldi into Gilead’s portfolio. The company desperately needs a repeat of such deals to get its revenues growing again. Unless the market sees a tangible prospect that can offset the declining sales numbers of Harvoni, the stock price will continue to stay depressed.
As expected, the company has lowered its guidance to reflect the increasing competition in the HCV market.
”we are updating full-year 2016 guidance, which is outlined on slide 21. The changes are as follows. We are lowering net product sales guidance to a range of $29.5 billion to $30.5 billion. While we are seeing continued strength in non-HCV product sales, given the current trends in payer and patient flow dynamics for HCV, our updated models suggest net product sales will range from being slightly above to slightly below $30 billion for the year. As such, we believe it is prudent to update our full-year 2016 guidance.”
Things aren’t looking too bright for Gilead on the revenue front, and with the company revising its guidance downwards, the stock inevitably dipped. However, one thing that the market is completely ignoring is the rest of Gilead’s portfolio, which is still showing growth. Moreover, they have adequate cash in hand to get over this bump on the road. A single deal they do now to acquire a potential blockbuster can stem their revenue slide, but the stock still has a long way to go before it can get back to its real value.
It’s a bet whether they can do it quickly, but in my opinion, the bet is still safe enough to make.