GILD Stock Tanks After Earnings: Opportunity, or Omen?

Advertisement

The good news is that Gilead Sciences, Inc. (NASDAQ:GILD) managed to trounce estimates last quarter, on the top and bottom lines. The bad news is that the pharmaceutical company doesn’t expect to do as well this year as analysts had been collectively expecting.

GILD Stock Tanks After Earnings: Opportunity, or Omen?Choosing to see the glass as half-empty rather than half-full, investors sent GILD stock down more than 7% on Wednesday following the Tuesday evening release of the Gilead earnings report.

Should this sharp drop be viewed as an omen of what’s to come, or as a buying opportunity?

GILD Stock: Earnings for Q4

In its fourth quarter of fiscal 2014, Gilead Sciences earned $2.43 per share of GILD stock on $7.3 billion in sales. Both figures topped expectations of $2.27 per share and $6.7 billion, respectively. Last quarter also thoroughly topped the year-ago numbers as well; the quarterly earnings from a year ago were 55 cents per share of GILD stock and $3.1 billion in sales.

No, that wasn’t a misprint — Gilead Sciences more than quadrupled its profits and more than doubled its revenue.

The driver of the enormous improvements of the top and bottom line were hepatitis C drugs Harvoni and Sovaldi.

Sovaldi was approved by the FDA in late 2013 and has been on the market for the better part of last year. Though controversial right from its launch because of the hefty $84,000 price tag for a typical 12-week treatment regimen, the company still managed to sell an eye-popping $10.3 billion worth of the drug in 2014, with $1.7 billion in sales coming in the fourth quarter.

An alarming slowdown for Sovaldi? Don’t be too concerned. Most of the slowdown in Sovaldi sales was ceded only to another Gilead hepatitis C drug, Harvoni, which was only launched in October. Harvoni hit the ground running though, generating $2.1 billion in sales in the fourth quarter of 2014 despite an even higher price than Sovaldi. Harvoni costs $1,125 per pill, or $94,500 for a typical 12-week dosage.

While Gilead Sciences markets other drugs, clearly Harvoni and Sovaldi are the cornerstones of the company at this point, jointly making up a little more than half of the company’s revenue in the fourth quarter. That’s a two-edged sword, however.

With most of its sales dependent on only two drugs — and with the future marketability of both now not so certain — the pharmaceutical company now expects a top line of somewhere between $26 billion and $27 billion this year, versus previous estimates of $28.5 billion. It was that dialed-down outlook and the reason for the concern that pulled the rug out from underneath GILD stock on Wednesday.

GILD Stock: Company Reacts

If the names Harvoni and Sovaldi seem more than a little familiar, it may be because they were the two drugs jeopardized by an alliance formed between Express Scripts Holding Company (NASDAQ:ESRX) and AbbVie Inc (NYSE:ABBV) in December.

In an effort to contain soaring drug costs, some pharmacy benefits managers are negotiating with drug companies, exchanging exclusive inclusion of a particular category of drugs for a lower price on that drug. As for what that meant to AbbVie and  Express Scripts, the latter promised not to include Harvoni and Sovaldi on its list of hepatitis C drugs found its formulary (a list of drugs that are purchased on behalf of patients by insurers) as long as the former made its comparable hepatitis C treatment Viekira Pak available to Express Scripts customers at a better-than-market price.

While one alliance that excludes Gilead Sciences isn’t earth-shattering, investors were understandably concerned that more such alliances could form to push Gilead further out of the market. GILD stock fell on that news, too.

Gilead Sciences has responded, though.

After a string of complaints about the high cost of Harvoni and Sovaldi — in the shadow of the AbbVie/Express Scripts deal — the company explained to owners of GILD stock participating in the Gilead earnings call that it would be lowering its price on the two hepatitis C drugs in order to keep them on insurers’ formularies. The lower price will crimp margins, but it will at least keep Gilead in the  lucrative hepatitis C market, which some believe is worth $4.7 billion per year.

Bottom Line for GILD Stock

While the price concession isn’t what GILD stock owners wanted, it’s better to for Gilead to keep a lower-margin toehold with insurers than risk pricing itself out of the market. And although margins will contract in the future, much of the adverse impact of lower prices on Harvoni and Sovaldi are already priced into GILD stock.

Factor in Gilead’s habit of understating its revenue potential, and today’s lull may actually be an entry opportunity.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/02/gild-stock-tanks-earnings-opportunity-omen/.

©2024 InvestorPlace Media, LLC