Gilead Sciences (NASDAQ: GILD), a global pharmaceutical company, reports Q2 results on Monday after closing.
1. Revenue and earnings forecast
Gilead Sciences forecast for Q2 is $ 3.02 EPS of $ 7.83B income. Gilead must meet this forecast EPS, it indicates that the company has not increased its EPS-this last quarter for the first time since 2013. Gilead had a spectacular 2015, beating EPS estimates by 10% or more each quarter. In Q1 2015, the company reported earnings per share of 2.94 vs. 2.32 expected, which made for a very welcome surprise rise 26%. Unfortunately, so far, 2016 has not been as impressive. EPS reports Q4 2015 and Q1 2016 exceeded estimates by a negligible 1%, to $ 3.03 per share. The slowdown also reflected in its current price: $ 86.55 from Friday’s close, far from its record high of $ 123.37 in June 2014.
2. Hepatitis C: The main activity of GILD
At this time, the two main diseases treated with drugs Gilead is HIV and Hepatitis C. His two biggest blockbusters products, both are the Hepatitis C virus (HCV), drugs and Sovaldi Harvoni. Together, these drugs account for almost half of company revenue.
It is understandable that during Monday’s report will focus attention on its recent performance. In Q1, sales of products HCV Gilead fell 6% year over year, to $ 4.3B. The problematic market for Gilead is America.
For most of the past three years, Gilead had a monopoly in the field of HCV drugs, which allowed uncontested profits accumulate. In late April, however, Abbvie Inc (NYSE: ABBV) launched its HCV drug competitive, Viekira Pak, followed by Merck (NYSE: MRK) competitive offer, Zepatier, launched earlier this year. Increased competition led to an inevitable loss of market share and a price war; Harvoni sold to 94K for the duration of treatment, Sovaldi of 84K, while Merck costs Zepatier 54K for the same course.
The three companies are applying for approval in China, where it is estimated that 10 to 20 million Chinese citizens have hepatitis C. Perhaps more important in the short term, on June 28, the FDA approved Epculsa, the newest treatment Gilead HCV, which is effective for the six main types of HCV – the first of its kind. As a comparison, Harvoni is mainly used to treat genotype 1, the most common form of hepatitis C in the United States and Europe.
Due to the recent introduction, the financial impact of the new drug will not be visible in the report next year, but its long-term effect could be important in the coming quarters.
3. Balance and Valuation
Perhaps one of the most compelling reasons for owning Gilead is its strong balance sheet. $ 115B company has more than $ 21B in cash assets, and is dedicated to a share buyback program that has taken more than $ 8 billion in shares from circulation. His current liabilities are less than $ 11B, which means Gilead has a ratio of cash / current liabilities pharmaceutical giants GlaxoSmithKline almost 2. (NYSE: GSK), Merck Abbvie and all have a ratio below 1.
The operating income of the company for Q1 was $ 4.6B in total revenue $ 7.8b, which means that its operating margin is 59%, which compares very well against Merck 17% or 37% Abbvie . Starting today, the company has a very low P / E ratio of 7.4, significantly lower than the industry average of 40. As if these numbers were not impressive enough, the company also has more than $ 17.7 B free cash flow, which means trades at less than 7 times its cash flow.
In June 2015, Gilead began handing back some of their surplus liquidity to investors as dividends. The dividend, which began as a quarterly payment $ 0.43; It grew to $ 0.47 – an increase of 9% – as recently as last month. With its current cash situation, it seems as if GILD be able to grow its dividend when and how you want in the foreseeable future.
4. The evolution of R & D portfolio
stock prices often reflect future expected value rather than actual value. For pharmaceutical companies, its portfolio of R & D can possibly be as if no-more important than their current product line. If that is the case, what is in the pipeline Gilead? Epculsa already mentioned above, which is expected to recover at least part of the income lost by HCV Gilead. GILD next big perspective is Simtuzumab, which is currently in a Phase 2. The drug is aimed at treating nonalcoholic steatohepatitis (NASH). If approved, it is expected to generate more than $ 10B in annual sales. Behind these two products, Gilead has seven advanced clinical trials and 16 additional phase two studies in the works. While its R & D spending to $ 3B annually are lower than those of Merck or Abbvie, which are on par with those of similar size GlaxoSmithKline, which indicates no skimping on the edge of Gilead.
Gilead currently generates more than $ 32B in annual revenue. It can no longer be considered an up-and-comer, as its stock price already has skyrocketed since the mid-30s by the end of 2012 to be at a regular price in more than $ 110, which occurred in 2014 and 2015.
Both its current performance and future prospects look good. Why then it is so underrated?
With a P / E ratio of 7.4, it Appears the market is discounting any future growth, and May Have Already priced in a decline in profitability. We believe this is an incorrect assessment of the company and Its potential.
An alternative explanation Could Be That unfortunately Gilead has-been Dragged Down by the pharma industry as a whole. As evident by the current performance of the popular SPDR S & P Biotech ETF (NYSE: XBI), Which is now trading at $ 59.35-well below its all-time high of $ 91.1 a year ago-The entire industry is still hurting, nor has it recovered from the early 2016 Valeant (NYSE: VRX) price-gouging fiasco pulled down the industry Which Significantly.
Notwithstanding all of the above, we believe it’s Merely a matter of time before Gilead’s share price recovers. The company’s revenues are immense, ITS operating margin is extraordinary, cash is flowing freely, and the company is buying back stock.
The way we see it, Gilead is like a high-end race car, spinning wheels ITS at the starting line, held back only by the weight of the industry in Which it Operates. Eleven That drag is removed, we believe it will take off at top speed, leaving at Least Potentially some competitors in the dust.