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Gilead Sciences, Inc. Stock Will Recover… Eventually

GILD stock - Gilead Sciences, Inc. Stock Will Recover… Eventually

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It appeared that Gilead Sciences, Inc. (NASDAQ:GILD) had turned the corner earlier this year after a long slump. Just three years ago, Gilead reached a high of $120 per share at the height of its HCV treatment sales surge. Then its revenues went into decline and took GILD stock with it; Gilead would go on to lose as much as half its value. But, in 2018, GILD stock was rallying again, it moved up from $70 in November to as high as $90 in January.

Sadly for Gilead holders, the company’s illness has returned. Shares slid to the $70s and then gapped way lower on a big earnings whiff. By the end of Thursday’s trading, GILD stock hit $65 and change, reaching levels near last summer’s low. And make no mistake, this earnings report wasn’t just short of expectations, it was a massive miss.

Earnings: What Went Wrong

The company reported earnings per share of $1.48, way below the $1.67 consensus guess. Revenues came in light as well, with Gilead generating $5.1 billion on the quarter. That missed estimates by $300 million and represents a 22% decline versus the same quarter last year.

The big problem for Gilead continues to be its fading HCV franchise. Gilead’s bold $11 billion purchase of Pharmasset in 2011 paved the way for the company’s stunning success this decade. The HCV cure it acquired in that acquisition, powered GILD stock from $20 at the time to the triple digits.

Unfortunately, that magic is now running in reverse. Since Gilead’s drugs cure the disease, rather than just treat it, revenues are now on the decline as a larger and larger portion of the potential patient pool is now healthy. Gilead’s HCV revenues were already in notable decline and now a new issue has emerged. Rival AbbVie Inc (NASDAQ:ABBV) has brought its own rival HCV product, Mavyret, to market. It’s starting to win over major adoption since it requires a shorter treatment time. Gilead stock bulls expected the HCV revenues to keep sliding, but the entrant of fierce competition is making it fade out even faster than expected.

There was also a slowdown in Gilead’s other main product family, its HIV drugs. There it is facing increasing pressure from generic drugs. On top of that, Gilead sold through less inventory of some of its drugs as it is preparing to launch its new treatment regimen Biktarvy and, thus, pharmacies needed less of the soon-to-be-obsolete current options.

What Gilead Needs to Get Back on Track

GILD stock bulls now are looking at three main areas that can get the company back on track in 2018. Keep in mind that Gilead maintained its 2018 guidance and management was buying back stock at much higher prices in the first quarter. Clearly, they haven’t thrown in the towel in 2018. Here’s what could turn things around:

First up, Gilead needs to slow the erosion in HCV sales to AbbVie and its Mavyret. Sure, HCV sales will continue to decline over time. But the speed of decline should drop if Gilead can demonstrate that it still has the best products in the space. Management gives the impression that this is true, but they need to show stronger results in coming quarters.

Next, it needs to demonstrate more momentum on the launch of its recently acquired Yescarta. Purchased in another blockbuster deal from Kite Pharma, Gilead has bet a ton of its HCV profits on Kite’s revolutionary CAR-T cancer therapy. In its first full quarter on the market, Yescarta did a modest $40 million in revenues. Analysts see Yescarta becoming a multi-billion-dollar-per-year drug by the early 2020s. If it gets there, it will do a ton to reinvigorate the bullish argument for GILD stock. But there’s a lot to prove before that happens, in particular to its extremely high price per treated patient.

Finally, the retooling of the HIV product line offers opportunity. The newer treatment regimen should improve patient compliance. This may reduce the tragically large number of US HIV patients that do not currently use drugs for their condition. Additionally, Gilead may be able to take market share from GlaxoSmithKline (NYSE:GSK) in the HIV space.

Is GILD Stock Cheap Yet?

Before moving to valuation, it’s worth noting that Gilead has a deep pipeline with several different potential blockbuster products. However, from a value investing standpoint, it’s important to focus on more predictable earnings rather than what may — or may not — emerge from future research efforts.

With that in mind, Gilead is now selling at just under 9 times trailing earnings following the stock’s plunge on Wednesday and Thursday. Analysts see earnings falling from $7.79 to $6.63 per share over the next 12 months, putting GILD stock right around 10x forward earnings.

In theory, that sounds great. However, Gilead has been trading at a single-digit PE ratio for several years now, and the stock keeps going down. A low PE ratio does little to protect the value of your stock if earnings keep shrinking. That said, earnings should bottom pretty soon. The current analyst consensus (subject to revision after this stinker quarter) has nearly flat earnings in 2019 and 10% growth back to $7.36/share for 2020.

And that seems plausible. Slow the decline in HCV, pick up some market share in HIV, and launch Yescarta strongly toward billion-dollar status. It’s a path to renewed EPS growth and a much stronger GILD stock price.

Unfortunately, all of that is going to take at least a few quarters to play out. It’s hard to see GILD stock surging in the near future unless biotech stocks as a sector really pick up. Gilead stock offers an attractive 3.4% dividend yield at the moment, and it’s probably undervalued here. But don’t expect a big run-up in price just yet.

At the time of this writing, Ian Bezek owned GILD stock. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media,

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