This article was written by Adam Feurstein, published on TheStreet Feb. 4 at 7:39 a.m.
Gilead Sciences (GILD) didn't provide a specific 2015 hepatitis C sales estimate on its earnings call Tuesday night, but enough information was disclosed to figure that the company's forecast is below current Wall Street expectations by about $1 billion or more.
Add the mixed hepatitis C outlook to Gilead's announcement about a dividend and another large share-buyback program, which implies no big acquisition this year, and it helps explain why the stock fell in Tuesday's after-hours trading session and is down 6% to $100.50 in Wednesday's pre-market session.
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Let's dig in:
Gilead expects its 2015 hepatitis C drug gross-to-net adjustment to be about 46%, or more than double the 22% in 2014. Gross to net measures the level of discounting ("net") Gilead offers customers from the list price ("gross") of its hepatitis C drug Sovaldi and Harvoni.
A 46% gross-to-net adjustment for Gilead's hepatitis C business is higher than investors expected, even though it's in line with the company's more mature HIV business. All that discounting reflects the competitive nature of the hepatitis C business now that Abbvie ABBV joined the market with Viekira Pak. (Abbvie's discounting is as high, or even higher.) Gilead is also seeking to treat more hepatitis C patients insured through Medicare and the Veterans Administration, where gross-to-net adjustments are more than 50%.
Gilead says it will have the capacity to treat 250,000 hepatitis C patients in the U.S. this year. That's a really big number, higher than many people expected. Gilead treated 140,000 U.S. patients in 2014. Gilead, however, also said its sales forecast for 2015 assumes fewer than 250,000 hepatitis C patients treated.
Essentially, Gilead is telling investors that the increased number of hepatitis C patients treated can make up any shortfalls from lower net prices.
Going into the earnings call, investors were expecting Gilead's hepatitis C sales to reach $11.7 billion in 2015. Based on what we know now about the price discounts offered for Harvoni and Sovaldi, Gilead would need to treat about 240,000 U.S. hepatitis C patients to reach that estimate, which seems unlikely, says Evercore ISI analyst Mark Schoenebaum.
By Schoenebaum's math, Gilead's implied hepatitis C sales estimate for 2015 -- U.S. and Europe -- is about $1 billion to $1.5 billion short of investor expectations.
That gibes with Gilead's stated forecast for 2015 total product sales in the range of $26 to $27 billion, which is about $2 billion short of Wall Street's estimates.
To make the picture even muddier, Gilead is typically conservative when it comes to the sales outlook it offers in the beginning of the year. The company almost always raises its estimate later.
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The biggest non-hepatitis C news made by Gilead Tuesday night was the approval of a cash dividend program. Starting next quarter, Gilead will offer shareholders at quarterly dividend of 43 cents per share, or $1.72 annually. Gilead joins Amgen (AMGN) as a large-cap biotech company offering a dividend.
Gilead also announced a three-year, $15 billion share-repurchase plan.
The dividend and continued share buybacks (Gilead repurchased $5.3 billion in stock in 2014) will get mixed reviews. The dividend will attract a new kind of investor to Gilead, which is a plus. But growth-seeking biotech investors may frown on the dividend because it suggests Gilead can't find a better way to use it cash, such as making big, acquisitions.
The truth likely lies somewhere in between. Gilead can pay a dividend, buy back stock and still have enough billions of dollars to do deals.
Based on my Twitter conversations Tuesday night, there's a sense that Gilead, like Apple (AAPL), is disrespected. Bulls points to Gilead's low earnings multiple relative to its large-cap biotech peers as proof the company is not recognized for its incredible outperformance.
I disagree. Gilead is not disrespected by anyone. The financial numbers put up by the company are among the best in the sector. Net product revenue in 2014 rose 127% to $24.5 billion. The company's hepatitis C business, alone, generated $12.4 billion in sales last year. Adjusted net income rose 286% in 2014 to $13.3 billion. These are amazing growth rates for a company as large as Gilead.
The debate raging among investors, however, is more about Gilead's future when hepatitis C revenue declines because of few available patients, greater-than-expected discounting and more competition. Astute investors look ahead and ask how Gilead will continue to put up extraordinary numbers when hepatitis C goes away. They're concerned the hepatitis C cliff may come sooner than expected.
That is a why investors are pining for Gilead to pull the trigger on another big acquisition, akin to the Pharmasset deal which got the hepatitis C party started. But if Gilead won't be buying Bristol-Myers Squibb (BMY) this year (my prediction), then the company's existing pipeline focused on oncology and other liver diseases such as NASH need to deliver.
Here's how RBC Capital Markets analyst Michael Yee frames the Gilead stock price debate for his clients Wednesday morning:
Where does the stock go? On upside, bulls will say expectations lowered and using low 12x multiple GILD can get to $115, where the stock was in 2014. On lower end, bears think pricing and estimates risky and could get riskier as Merck enters in 12 months (this is a key debate). This implies bearish P/E ratios of 9-10x like the 2010 period and $85-95, the range the stock has traded over the last 6-8 months as Abbvie competition emerged.
