Gilead Sciences - After Another Amazing Year, It Is Time To Be Cautious

Nov. 1.13 | About: Gilead Sciences, (GILD)

Shares of Gilead Sciences (NASDAQ:GILD) jumped up on Wednesday after the biopharmaceutical company released its third quarter results before the market open.

Third Quarter Results

Gilead Sciences generated third quarter revenues of $2.78 billion, up 14.7% on the year before, and ahead of consensus estimates at $2.72 billion.

Non-GAAP earnings rose by 11.4% to $879.1 million, with non-GAAP earnings coming in at $0.52 per share. Analysts were looking for earnings of $0.48 per share.

GAAP earnings increased by 16.7% to $788.6 million, as diluted earnings per share rose by four cents to $0.47 per share.

Looking Into The Results..

Growth was driven by the antiviral segment which reported solid revenue growth of 14%, coming in at $2.33 billion. Sales of blockbusters Atripla and Truvada rose by 4% to $899.7 million, and 1% to $813.7 million, respectively.

Yet growth was mostly driven by spectacular revenue growth at Complera/Eviplera and Stribild. These drugs reported revenue growth of 112% to $210.7 million, and 722% to $144.0 million, respectively.

Cardiovascular revenues totaled $250.9 million for the quarter, up 25% on the year before driven by solid sales growth at Letairis and Ranexa.

Note that earnings growth was limited despite solid revenue growth. This was due to progression on Gilead's research efforts in oncology and HIV.

..And The Rest Of The Year

Gilead now sees full-year revenues of $10.3-$10.4 billion, up from a previous guidance of $10.0-$10.2 billion.

R&D expenses are expected to increase from $1.8-$1.9 billion to $1.95-$2.0 billion. Selling, general & administrative expenses are expected to fall from $1.55-$1.65 billion to $1.50-$1.55 billion.

Valuation

Gilead ended its third quarter with $2.76 billion in cash, equivalents and marketable securities. The company operates without the assumption of debt, for a solid net cash position.

Revenues for the first nine months came in at $8.08 billion, up 13.6% on the year before. Net earnings rose by 25.1% to $2.27 billion. As such, annual revenues could come in around $10.3 billion with earnings seen around $3.0 billion.

Factoring in gains of 4% on Wednesday, with shares trading hands at $72 per share, the market values Gilead at $111 billion. This values operating assets of the firm around $108 billion. This values operating assets of the firm at 10.5 times annual revenues and 36 times annual earnings.

Gilead does not pay a dividend at the moment.

Some Historical Perspective

Long-term investors in Gilead have seen decent returns, driven by the solid returns in 2012 and 2013. Between 2004 and 2012, shares have traded in a $10-$30 price range.

Towards the end of last year, shares broke out towards the upside. After shares have nearly doubled this year, they are currently trading at $73 per share, trading at all-time highs.

Between 2009 and 2012, Gilead Sciences has increased its annual revenues by a cumulative 38% to $9.7 billion. Net earnings stabilized around $2.6 billion in the meantime, after peaking at $2.9 billion in 2010. Note that earnings per share did see some growth after Gilead retired a tenth of its share base outstanding.

Investment Thesis

Gilead is firing up all cylinders this year, resulting in solid operating performance, accompanied by even more impressive share price returns.

On top of the spectacular revenue growth being reported by Complera/Eviplera and Stribild, analysts are even more enthusiastic about the HCV treatment for people infected with hepatitis C.

For now, Gilead is still waiting for a Food and Drug Administration verdict on the treatment, called Sofosbuvir, with the decision being expected in December. The market for Hepatitis C is big with an estimated 4.1 million patients in the US and 2.8 million patients in the EU. According to Gilead, less than half of those patients have been diagnosed, with less than 10% being treated.

Note that Gilead got a hand on Sofosbuvir following the $11 billion acquisition of Pharmasset in 2011. Some analysts already expect that once approved, Sofosbuvir could immediately become a blockbuster, generating annual revenues north of a billion.

Note that a $11 billion deal only makes up about 10% of Gilead's current market capitalization around $110 billion. Yet the deal was announced two years ago, and was quite a big gamble as Gilead was prepared to pay roughly a third of its current market valuation to acquire Pharmasset. Many were skeptic at the time, after Gilead offered a 89% premium for Pharmasset, which even for pharmaceutical standards was really big.

Almost a year ago, in December of last year, I last took a look at Gilead's prospects. At the time, shares were trading around all-time highs of $37 per share. In less than a year, shares have roughly doubled on the back of the strong operating results and hopes for Sofosbuvir.

A year ago, Gilead had just recently received approval by the FDA for Stribild, a drug which now already reported revenues of $144 million in just one quarter. A year ago, shares had already rallied some 80% so far that year. After those returns, shares were trading around 22 times earnings at the time.

At the time of writing last year, I concluded that the strong growth prospects could make an acquisition target of Gilead, despite a $56 billion market capitalization at the time. Given that many bigger names were struggling to generate growth, or even maintain their revenues, I was anticipating that Gilead could be involved in renewed merger and acquisition activity. Such a move has not materialized.

Given the continued growth, and assuming approval and successful launch of Sofosbuvir, annual revenues of $15 billion in two years' time seem within reach. In such a case, earnings could come in around $5 billion. Yet the market valuation has already topped $100 billion, making shares a bit too rich to my opinion at the moment.

For now, I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.