- Despite delivering disappointing results, the company can still achieve significant growth.
- Gilead has a rich pipeline, creating opportunities that may allow the transformation of the treatment of many diseases.
- Gilead has the resources to make significant acquisitions to resume growth.
On April 28, Gilead Sciences (NASDAQ:GILD) reported disappointing results for its Q1 2016, which missed EPS expectations by $0.12 (3.8%). First-quarter revenue rose 2.6% to $7.794 billion from a year earlier, also missing the average analyst prediction of $8.135 billion. As a result, Gilead's shares have dropped 12.7% in the following days. However, in my opinion, the company can still achieve a significant growth due to its rich pipeline with over 25 different programs under development and by a large acquisition.
Gilead’s blockbuster hepatitis C drugs Harvoni and Sovaldi accounted for most of the decrease in first quarter sales. Harvoni missed badly in the U.S. but outperformed abroad, while Sovaldi sales increased in the U.S. Sales of Harvoni and Sovaldi accounted for 55.9% of total product sales in the first quarter of 2016, for 59.5% in 2015, and 50.7% of total product sales in 2014. HCV products sales were $4,294 million in the first quarter of 2016, a 12.2% decrease from the previous quarter, and 5.6% decline year-over-year. Gilead's HCV drugs sales in the last nine quarters are shown in the chart below.
Source: company's reports
Also on April 28, AbbVie (NYSE:ABBV) reported that its Harvoni competitor Viekira also came up short of consensus, which the company attributed to Merck's (NYSE:MRK) unexpected aggressive pricing of recently launched rival Zepatier. Merck reported its first-quarter 2016 financial results on May 05, showing only $50 million revenues from Zepatier. The table below presents first quarter revenues of the three companies' HCV drugs which clearly indicate that Gilead HCV drugs continue to hold more than 90% market share. However, the damage to Gilead by its competitors was not on market share but pricing. Gilead's HCV drugs Harvoni and Sovaldi sales in the U.S. have dropped due to the increase in discounts required to open up access to patients with lower fibrosis scores and a modest shift in payer mix toward more deeply discounted government payer segments.
Source: companies' reports
Key Growth Drivers
Gilead has a rich pipeline of over 25 different programs under development, and it is increasing its research and development expenses from $3.0 billion in 2015 to $3.2-$3.5 billion in 2016. Gilead's rich pipeline is creating opportunities that may allow the transformation of the treatment of many diseases, like NASH, HPV, inflammatory diseases, certain cancers, and cardiovascular conditions for which few, if any, options exist. To keep up growth, Gilead has struck deals to build up its pipeline of experimental drugs.
In December 2015, Gilead said it would pay $725 million to acquire a stake in Galapagos N.V., buying into the Belgian drugmaker's experimental treatment for rheumatoid arthritis. In April, it said it would pay $400 million for a drug from closely held Nimbus Therapeutics LLC to add to its portfolio of treatments for the fatty liver disease known as nonalcoholic steatohepatitis, or NASH.
Last month, at The International Liver CongressTM 2016 in Barcelona, Gilead presented multiple HCV and HBV data, which demonstrates the company's success in developing new applications for its compounds. The company announced results from several Phase 2 and Phase 3 studies evaluating its two investigational, pangenotypic, fixed-dose combination therapies for the treatment of chronic hepatitis C virus infection, as well as new data highlighting the potential use of Harvoni in adolescents aged 12 to 17. According to Gilead, the data continues to underscore the high cure rates and safety of its sofosbuvir-based HCV therapies and supports their utility across all patient HCV genotypes and disease stages.
Many investors believe that Gilead could return to high growth only by a major acquisition. The company has a strong balance sheet and it is generating substantial cash flow. As of March 31, 2016, Gilead had $21.3 billion of cash, cash equivalents and marketable securities, and cash flow from operating activities was $3.9 billion in the last quarter. As such, Gilead still has enough resources to make a significant acquisition when the opportunity arises. On the first quarter conference call, CFO Robin Washington explained that the company will continue to make acquisitions when the right opportunities present themselves.
According to Mr. Washington, the company has purposely focused on share repurchases, because in the absence of M&A, it allows the company to be flexible and more opportunistic. However, when the right M&A opportunity presents itself, it allows the company to reduce its share repurchases to make those necessary acquisitions and leverage its cash and debt and borrowing if it needs to. Also on the call, CEO John Milligan, clarified that while the company prefers friendly acquisitions, it is not unwilling to go hostile.
Considering its compelling valuation metrics, Gilead stock, in my opinion, is undervalued. Gilead's trailing P/E is very low at 7.11, and its forward P/E is even lower at 6.82. The Enterprise Value/EBITDA ratio is also very low at 5.30, and the price to cash flow ratio is at 6.48.
Despite delivering disappointing results, the company can still achieve significant growth. Gilead has a rich pipeline, creating opportunities that may allow the transformation of the treatment of many diseases for which few, if any, options exist. What's more, Gilead has a very strong balance sheet. As such, the company has the resources to make significant acquisitions to resume growth. Moreover, the company generates strong free cash flow and returns substantial capital to its shareholders through stock buybacks and dividend payments. As I see it, the recent drop in Gilead stock price creates an opportunity to buy the stock at an attractive price.