If you are buying into Gilead Sciences' (GILD) better-than-expected earnings, be ready to ride the dividend, because you won't see price growth this year. That's my view, at least. -. The company's third quarter results showcase my point. Despite beating analyst's views, revenue and earnings both fell. I don't really care if a company beats estimates if its profits still drop 22%. That's plain bad.
With the market corrections taking place, I don't see Gilead making any runs this year. They have a ton of cash, but haven't put it to use yet. All that said, I think hepatitis sales are so low at this point that revenue should start to stabilize. To that end, Gilead is a cheap stock with a nice dividend.
"Beating" Estimates
As the company's once-coveted hepatitis C drugs continue to decline in sales, profits continue to falter. It's been one of the most straightforward revenue declines I've ever watched. Every quarter, Harvoni is down. Look at the annual financials. Every year, sales and net income dip. This year, as the company works to build new outlets for growth, they've allowed expenses to keep gaining even as sales decline. In the first nine months of the year, costs and expenses have increased 11.4% to $9.27 billion, while revenue fell 18.9% to $16.33 billion. Operating income is down 40% for the year to $7 billion; while third-quarter operating income dropped 31% to $2.62 billion.
Of course, earnings have followed suit. Third-quarter net income fell 22.6% to just under $2.1 billion. On that income, diluted earnings per share decreased a comparable 22.1% to $1.62 per share.
From here in, I do think the effects of further fallout in hepatitis will be less disruptive to the overall revenue stream. The sales figures for the drugs in this lineup have fallen so much that HIV drugs are the main source of cash for the company now. Last year, Hep C treatments garnered the company over $2 billion in sales revenue in the third quarter. In Q3 2018, the lineup brought in a little over $900 million. In contrast, HIV drugs brought in over $3.7 billion in the third quarter. That's an 11.8% increase year over year.
Yes, I believe most of the pain from the decline of a juggernaut (i.e. their hepatitis C lineup) is behind us. Now, the company faces the prospect of finding a second act comparable to the first. We all know about the $12 billion acquisition of Kite Pharma that gained them access to the novel T Cell treatments for cancer. It is cutting edge medicine, but the company hasn't made much progress on revenue in this area, yet. Currently being marketed as Yescarta, for the treatment of lymphoma, this new treatment has a ways to go in terms of negotiating pricing with coverage providers, institutions, etc. Sales for Yescarta were $75 million in the third quarter. No one should ever complain about $75 million, but there's a long way to go here.
Other initiatives include the release of generic versions of Harvoni and Epclusa. Competitors like AbbVie (ABBV) have been lowering the earnings potential of these Hepatitis C drugs as they compete over price (not to mention that a drug that cures, results in a declining consumer base). This might help some, but I don't see it as a key driver of the share price.
Time to Buy?
Gilead will now be relying on HIV sales revenue to keep things flowing while it works to bolster its results in oncology treatments. On top of that, pay close attention to how development proceeds on their pipeline for Rheumatoid Arthritis -- Filgotinib has passed through phase three clinical trials with very positive results. It's worth noting, though, that there are already competitors within the arthritis space. While they most certainly have some positive things happening here, it's not enough to get me enthused on the level that Harvoni or Sovaldi did. Furthermore, the drug isn't finished with all the safety studies. It will not be a contributing factor to sales in the foreseeable future.
So, the only thing that can drive the share price through the fourth quarter and into the first quarter of 2019 will be continued HIV growth, and the eventual hiring of a new CEO. Personally, I think the CEO thing will be a short-lived catalyst in a positive or negative direction. Gilead's stock has demonstrated over and over again that it follows sales and earnings. The low P/E demonstrates that fact. Many want to see the new CEO in order to derive a better understanding of where the company is going. I think it's already abundantly clear that they're moving into oncology. You don't spend $12 billion if that isn't where your priority is.
I've been critical of the stock through recent quarters, as the progressive hepatitis decline has outpaced rising HIV drugs. I think the Hep. C sales have fallen so low that things should start to bottom out in terms of overall revenue declines. Biktarvy, the company's newest in the HIV lineup, has displayed solid sales of $606 million in the first nine months of the year. This should help keep the company's current position relatively stable.
I reiterate, I don't see much momentum right now that will move the stock up. The continued steadiness of HIV should keep the stock where it is, but it won't create bullish trends. We need to see big gains. We need to see that Kite Pharma deal start yielding bigger returns. We need to see management find more places to put that $30 billion cash hoard.
Thanks to its cheap share price, I think Gilead will be relatively insulated from the broader market fallout, but that won't create upside. There are a lot of opportunities here, but they haven't been put to use. Be ready to ride that dividend.
