2023-11-13 04:53:00 ET
Summary
- Gilead Sciences has seen mixed signals in its earnings and sales growth, but the stock is appealing at lower levels.
- Gilead's success with a cure for HCV led to a decline in patient population and margin pressure.
- The company has made acquisitions to diversify its business, but sales have been relatively flat outside of its Covid-19 drug, Veklury.
In August, I believed that there were mixed signals again in the case of Gilead Sciences ( GILD ) . While non-Veklury sales grew in the second quarter, the same could not be said for earnings, as focus and execution on greater diversification and pipeline conversion were both desperately needed.
After a somewhat mixed third quarter, and shares having seen a modest decline since August, I like the appeal of Gilead here a bit more at these lower levels, making me a further buyer of today's dip. While Gilead is still far from perfect, it is cheap and growth prospects look reasonable, making me long-term upbeat on Gilead here.
Some Perspective
A decade ago Gilead was a $20 stock. Its fortunes changed after an $11 billion deal for Pharmasset, through which Gilead obtained a cure for HCV. Its success sent shares to levels around the $100 mark in 2014 and 2015.
This cure has been somewhat of a mixed bag. The success propelled shares higher but created a headwind to the growth of the business as well, as Gilead's drugs provided a cure thereby rapidly depleting the patient population. Furthermore, not all capital allocation actions have worked out fine (i.e., share buybacks at elevated levels and some expensive M&A activity).
In the near decade which followed shares have essentially traded in a $60-$90 range as the company spent billions on M&A and buybacks. Some of these deals include a $21 billion deal for Immunomedics (through which the company obtained Trodelvy), a $12 billion deal for Kite Pharma (through which Gilead obtained Yescarta), as well as many other deals.
Revenues peaked at $33 billion, at the time accompanied by operating profits of $22 billion, but the cure led to sales falling to just $22 billion in 2018, accompanied by real margin pressure. Revenues recovered to $27 billion in 2021, but this included a $5.5 billion revenue contribution from Veklury, Gilead's Covid-19 drug, as otherwise, sales have been coming in rather flat.
The composition of the base sales had changed in a big way over the years as the HCV business imploded to just $2 billion. Gilead has actually largely become a play on HIV, responsible for $16 billion in sales, complemented by HBV/HDV sales, cell therapy (oncology) sales, and other sales.
2022 revenues were flattish at $27 billion, but as non-Veklury sales were up 8% to $23.1 billion, there were indications of a real return to growth. The company originally guided for 2023 sales to fall to $26.0-$26.5 billion, however, including a mere $2 billion anticipated contribution from Veklury, indicating further organic growth outside Veklury. The problem is that these Veklury sales were quite lucrative, as the company originally guided for 2023 earnings to come in between $6.60 and $7.00 per share.
2023 - Resilient
In April, Gilead posted a 3.5% fall in sales to $6.31 billion, as non-Veklury sales were up 15% to $5.7 billion, while Veklury sales were down two-thirds to $573 million. Given these topline developments, I found a 35% fall in adjusted earnings to $1.37 per share rather soft.
Second quarter sales rose 5% to $6.6 billion with Veklury sales down another 43% to $256 million as non-Veklury sales were up 11% to $6.3 billion. This was driven by a resilient performance of HIV, but notably a 38% increase in oncology sales to $728 million. Earnings were down another 15% to $1.34 per share.
The midpoint of the full-year guidance was hiked to $26.5 billion, an increase of a quarter of a billion, even as Veklury sales were seen down three hundred million to $1.7 billion. The Veklury sales meant that the earnings guidance was cut to $6.45-$6.80 per share, all while net debt was flattish at $17 billion.
Trading at 12-13 times earnings, multiples were non-demanding, but of course, interest rates kept rising over time, as the reported earnings were adjusted earnings, and Gilead has some real inroads to make to diversify the business. It simply still relies on HIV in a big way. As not all M&A has played out, I was worried that the company's announced mixed shelf offering indicated another deal might be in the cards, as the focus should really be on R&D and pipeline conversion in my eyes.
Trading at $80 I was long-term upbeat, but in no rush to add to a position.
Muddling Though
Forwarding from August to today, shares have been trading largely around the $75 mark, currently trading at those levels. In September, Gilead announced an interesting bond offering, as it priced $2 billion in long-term notes, split equally between maturity dates in 2033 and 2053, carrying coupons at 5.25% and 5.55%, respectively.
In November, Gilead posted flattish third quarter sales at $7.05 billion. Veklury sales were down 31% to $636 million, yet product sales outside Veklury grew only 5% to $6.36 billion, growing at a much lower pace. HIV sales growth slowed down to 4% with revenues reported at $4.67 billion, oncology sales slowed down to 33% with revenues reported at $769 million as liver diseases unexpectedly fell 10% as well. Contrary to the first half of the year, earnings actually improved, with adjusted earnings up thirty-nine cents to $2.29 per share, albeit this was largely due to a favorable tax item.
Net debt was pretty flattish at $17 billion, still very manageable, with deleveraging potential hurt by higher dividends and continued buybacks, albeit the latter at a very modest pace.
Following the third quarter results, the company hiked the full year sales guidance to a midpoint of $26.8 billion, up some three hundred million from the previous guidance, albeit the hike in the sales guidance is mostly driven by a $200 million increase in Veklury sales, seen around $1.9 billion now. Given the stronger earnings in the third quarter, adjusted earnings are now seen up to $6.65-$6.85 per share.
What Now?
Truth be told, shares of Gilead have been trading quite steadily this year, as many pharmaceutical companies have sold off quite a bit on concerns related to patent cliffs, pressure on drug pricing as well as a new range of weight-loss drugs, which could really hurt demand through a big decline in patient populations.
Amidst all this, Gilead is actually a steady performer, but there is still quite some work to do, notably on the front of diversification, sustained revenue growth, and leverage (which is not a big issue) but still could come down, certainly as the company recently issued debt at 5% and change.
Given all this, Gilead looks like a decent long-term play here, as the latest move lower increases appeal a bit, making me tempted to add to a long-term existing long position here.
For further details see:
Gilead Sciences: Slow Progress, But Progress Altogether