Gilead Pops On Hepatitis Pills

5/11/2015


  Recent Price
$102
  Dividend
$1.72
  Yield
1.7%
  P/E Ratio
11
  Shares (millions)
1,569
  Long-Term Debt as % of Capital
43%
  52-Week Price Range
$116.83 - $76.80

Gilead Sciences ($102; GILD) reported March-quarter earnings per share of $2.94 excluding special items, up from $1.48 and the consensus of $2.32. Revenue jumped 52% to $7.59 billion, comfortably ahead of the consensus of $6.92 billion. Combined sales of hepatitis C drugs Sovaldi and Harvoni doubled to $4.55 billion (60% of quarterly sales), trouncing analyst expectations. Shares surged on the results.

Operating cash flow more than doubled to $5.7 billion in the March quarter. That growth was partly inflated by unpaid rebates to insurers and governments related to Harvoni, launched in October, which will reverse cash flow in coming quarters. Still, in February management initiated a quarterly dividend of $0.43 per share, payable June 29, and launched a $15 billion stock-buyback program. The share count has declined sequentially in five straight quarters, shrinking more than 7% in that time. Gilead, a Long-Term Buy yielding 1.7%, is being added to the Buy List.

A prescription for optimism

Gilead expects its drugs to treat at least 250,000 hepatitis C patients in the U.S. and 100,000 in the European Union this year. The drugs cure nearly all patients, casting doubt on the durability of that revenue stream. Those worries appear partly reflected in 2016 consensus estimates, which project just 3% higher earnings per share on 1% revenue growth.

We see at least three reasons to believe Gilead can top expectations:

Difficulty eradicating hepatitis C: Only about half of the estimated 3.3 million Americans with hepatitis C know they are infected, which could make the disease tough to stamp out.

Broad drug portfolio: Although hepatitis C drugs dominate Gilead's headlines, five other drugs, all HIV treatments, generate more than $1 billion in annual revenue. Drugs with U.S. patents expiring before 2021 accounted for just 10% of Gilead's revenue last year; none ranked among its six biggest sellers.

Ability to make a big acquisition: Gilead's war chest of cash and marketable securities swelled to $14.51 billion at the end of March, up 24% from three months earlier. While discussing March-quarter results, management said "it would be a good time for Gilead to consider a wide range of things." Gilead has a favorable track record with deals. It spent $11.05 billion in cash to acquire Pharmasset in January 2012, paying an 89% premium. Pharmasset was developing a pill to cure hepatitis C that eventually led to Sovaldi and Harvoni, which combined for $14.69 billion in sales over the past 12 months.

Conclusion

Gilead raised its 2015 guidance for product sales (about 98% of total revenue) by $2 billion to a range with a midpoint of $28.5 billion, implying 16% growth. Management maintained its target range for gross profit margin (87% to 90%), easing some concerns that it may be forced to further increase discounts for hepatitis C drugs.

The stock trades at just nine times estimated 2015 earnings, 62% below the industry median. An annual report for Gilead Sciences Inc. is available at 333 Lakeside Drive, Foster City, CA 94404; (650) 574-3000; www.gilead.com.

GILEAD SCIENCES
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '15
2.94
vs.
1.48
52%
107.77
-
93.18
13 - 11
Dec '14
2.43
vs.
0.55
134%
116.83
-
85.95
19 - 14
Sep '14
1.84
vs.
0.52
117%
110.64
-
83.32
23 - 17
Jun '14
2.36
vs.
0.50
136%
84.45
-
63.50
28 - 21
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
24.89
8.09
0.00
116.83
-
63.50
14 - 8
2013
11.20
2.04
0.00
76.11
-
36.94
37 - 18
2012
9.70
1.95
0.00
38.56
-
20.67
20 - 11
2011
8.39
1.93
0.00
21.75
-
17.23
11 - 9
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
98
91
99
83
89
28

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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