Last month, I thought the run in the shares of Gilead Sciences (GILD) was over.
The company reports after the close on Tuesday, and I am expecting it to beat the Street estimate.
But it's not the quarter I'm worried about; it's next year. We are at the point in the year when investors begin to look out to 2016. And I don't think they will like what they see.
For fiscal 2015, the consensus is looking for revenue of $30.3 billion and $30.6 billion for next year. That's not a big jump. In fact, its top line growth is 0.76% and earnings per share are expected to grow just 3% from $10.87 to $11.18.
How can this kind of "growth" support a $125 consensus price target? Yes, I know Gilead is a high-quality biotech company and it has an interesting pipeline, but I don't see how investors can sit in a biotech with few immediate growth prospects.
For the second quarter, analysts are looking for revenue of $7.6 billion and earnings per share of $2.71. Gross margins are expected to be 87.9%.
AbbVie (ABBV) has estimated the number of patients with genotype 1 hepatitis is about 175,000-180,000 in the U.S., but the long-term trend is down. According to IMS Health, the number of prescriptions continues to decline.
Generally speaking, prescriptions peak around week 17 of the drug launch. At around 40 weeks, both Harvoni and Sovaldi are well past the prescription peak. That's what happens when you cure people. You run out of patients!
While the worldwide market for Hepatitis C is large, there's too much competition to drive top line growth very far.
Merck (MRK) released results from its Phase 3 C-EDGE drug trial, which examined the effectiveness of its grazoprevir/elbasvir fixed dose combination. While Merck's cure rate was lower (90.2% vs. Gilead's 95.3%), it seems likely Merck will receive FDA approval for their drug regime anyway. Most expect the FDA to act before the end of January.
And that's the problem. While Merck's solution is less effective, it may be effective enough to force Hepatitis C drug prices lower.
I would avoid shares of Gilead, until the company's future is more certain.