Gilead Sciences (GILD) has been suffering from a stagnating product line. Well all know that the Hepatitis C drug maker has suffered from the inevitable outcome of creating a cure for a disease. You tend to diminish your patient count over time. From a moral standpoint, it's great. From a business standpoint, it means Gilead needs other routes for revenue. The company's second act has a few different directions, but they're all either long-term possibilities, or they're facing rising competition from rivals.
Today Gilead released its second quarter results and delivered some beats over estimates. In my opinion, the earnings beat doesn't amount to much. Gilead's earnings per diluted share still fell by around 40% year over year to $1.39 per share. Revenues fell by 20.9% to $5.64 billion. Forget beating estimates. Do these seem like good numbers? The answer is unequivocally no. The company is losing sales aggressively as it fails to create any business substantial enough to make up for the shrinking sales in their Hepatitis C drugs.
The downward trend
The hits started coming in 2016. Prior to that, Gilead Sciences had one of the best stories in the stock market. Revenues topped out at $32 billion in fiscal 2015, with over $18 billion in profits. Since then, declining overall Hepatitis C drug sales have induced detrimental declines to Gilead's annual sales. The falling sales have come in conjunction with higher SG&A expenses, lower gross incomes, and higher interest expense. In all, net incomes have predictably suffered. Fiscal 2017 net income of $4.63 billion marked a 65% decline year over year. Though it should be noted that 2017 involved nearly $9 billion in taxes and a big acquisition. Earnings per diluted share for that year declined a comparable 64% to $3.51. The lower net incomes might have had an even bigger effect on earnings per share if not for the share buybacks that have taken place.
The big balancing act that keeps Gilead interesting is its massive stock of cash. However, due to acquisitions and certain investments, Gilead's cash on hand has dropped roughly 50% since last September to $7.64 billion. Obviously that's still a ton of cash. Furthermore, total cash and short term investments is well over $24 billion in total. Financially, the company is safe. But where will the new growth come from?
Acquisitions take development, organic growth is being challenged
Gilead has tried a few different things to boost the growth story. They've introduced newer, more refined Hepatitis drugs; as well as made moves into growing their HIV franchise.
Total HIV sales of $3.7 billion are certainly nothing to scoff at. Sales increased 15.6% year over year. Unfortunately, that $500 million increase in sales doesn't begin to cover the huge fallout occurring in the Hepatitis market. Gilead's chronic hepatitis product sales have fallen 65% year over year from $2.9 billion in Q2'17 to $1 billion in Q2'18. That's a pretty big market decrease. Gilead noted the main culprits of the decline stemming from fallout in Harvoni, Sovaldi and Epclusa sales from rising competition.
The quarter has made it even clearer that while HIV sales have acted as a counter lever to diminished potential of things like Sovaldi or Harvoni, they're not creating enough of a "moat". The future seems even more competitive.
Glaxosmithkline (GSK) is making big waves in the clinical trials of its two step HIV treatment. It consists of two drugs, and has proven to perform just as well as the current three drug standard. Make no mistake, this is big. The two drug approach would lower costs for patients, as well as diminish the chances and severity of side effects. If you can take two pills instead of three, you're going to do it. You're definitely going to do it if it's cheaper.
There are still some concerns about the long term potential of the treatment regarding developments of drug resistance, but for the most part is sounds to me like this is going to be a competitor to Gilead. If regulatory approvals are passed and Glaxosmithkline starts pushing further into the market, I fear it could have heavy effects on Gilead. Long term, it appears that GSK's subsidiaries are pushing even further into the HIV market with studies on more long acting treatments. This would mean that patients would be able to receive treatment less frequently than the current drug regiments; principally in two month intervals.
This could be really huge if it all pans out. While still in phase 3 treatment studies, I think the company that can peg the market on a more spread out treatment plan like this is going to win the day. It's far more convenient to patients. The point of all this is that Gilead's reliance on HIV drugs to bolster the other faltering areas of its business might become troublesome if competitors start breaking out superior products.
Of course, none of this stuff is as nearly important to the long term bulls as is Gilead's foray into oncology. With the acquisition of Kite Pharma, Gilead Sciences staked its nearly $12 billion claim to the fledgling immunotherapy approach to cancer. The CAR-T treatment known as Yescarta is Gilead's big move. They need this to pan out in a huge way in order for the stock to regain traction. There are a lot of obstacles here. For one, the treatment is $375,000. That in itself limits the consumer base. In rolling out the treatment for lymphoma, Gilead has struggled with negotiating payer coverage. Predictably, insurance companies are probably going to fight having to foot the bill for something this expensive. It's the world we live in unfortunately. In the second quarter, Gilead's Yescarta provided a small $68 million in revenues from lymphoma treatment. The takeoff isn't exactly what some had hoped for. Gilead has brought in an oncology veteran by the name of Michael Amoroso do begin working to improve the overall flow of this new novel treatment. To add fuel to the fire, competition is once again at the gates.
Novartis (NVS) has FDA approval for its own CAR-T treatment. Called Kymriah, the rival treatment is already forcing Gilead to face substitute goods. This economic situation is not something Gilead is used to facing. When they rolled out their Hep C cures initially, there were virtually zero substitutes; allowing them to grab up market share early. That might not be the case this time around. I also anticipate that the comparable products will force Gilead and Novartis into pricing wars. This could be immensely beneficial to consumers, but it could hurt Gilead's bottom line. There are few signs of a price war at present, but in my view they're almost unavoidable when two juggernauts are fighting for market share. Time will tell. To this point, neither treatment has brought in meaningful revenues. Novartis' Kymriah brought $12 million in sales in the first quarter of the year. That's not anything to write home about when you consider the kind of money these companies work with.
When you take these factors into account, Gilead's return to strength is not as clearly defined as one might imagine. Take that into account when looking at the stock price. The only news that I wouldn't over think is the sudden exit of CEO John Mulligan. The guy has been at the company for 28 years. He's just ready to move on. Maybe the company is looking for a new direction. Maybe he's just tired. Either way, it's not the end of the world. He hasn't exactly done much to stem the sales fallout of recent years anyway. The stock is down 3% in afterhours trading. Based on the earnings beat, I have no doubt that Gilead will meet its forecasts. The stock will likely remain in the current P/E range of around 12. That means anyone hoping for a big jump won't be getting it any time soon.
