- Gilead reported blow-out second quarter results driven by Sovaldi of course.
- The full year outlook looks conservative, implying second half sales to drop.
- Despite risks related to pricing and competing drugs, the overall valuation remains compelling enough.
Gilead Sciences (NASDAQ:GILD) reported very strong results for the second quarter with all eyes being on its Hepatitis C drug Sovaldi again.
Sales of Sovaldi were very solid, being the driver in the earnings beat. I remain cautiously optimistic, although I acknowledge the risks related to competing offerings as well as scrutiny about pricing.
That being said, the current valuation should result in enough margin of safety to hold on to the stock, or initiate a position.
Second Quarter Headlines
Gilead posted second quarter revenues of $6.53 billion, up a 136.1% compared to last year. Revenues rose by 30.7% compared to the first quarter when Sovaldi made its first full quarter contribution. Sales came in far ahead of the consensus estimates at $5.86 billion.
Reported net earnings came in at $3.66 billion on a GAAP basis, which compared to earnings of just $772.6 million reported last year. Earnings were up by 64.1% compared to the first quarter.
As such, reported GAAP earnings came in at $2.20 per share, while non-GAAP earnings totaled $2.36 per share. Analysts were looking for earnings of $1.79 per share.
All Eyes On Sovaldi
Of course all eyes were on Sovaldi again, which generated $3.48 billion in sales for the quarter. This compared to $2.27 billion in sales for the first quarter. Of these sales, Gilead still generates the vast majority within the US in which it posted sales of $3.03 billion. European sales came in at $400 million, while sales in other international countries totaled just $49 million.
This results in Sovaldi now making up more than half of total sales while the company of course has five other marketed antiviral products. Its second best selling drug is Atripila, which posted a 7% decline in sales to nearly $871 million as Truveda sales were flat at $807 million.
Other meaningful areas of growth were Complera/Eviplera as sales were up by 59% to nearly $300 million. Sales of Stribild rose by a very impressive 171% on the year before, adding nearly $270 million to total sales. Total cardiovascular sales rose by 14% to $267 million.
Interesting in today's tax debate and possibilities for inversions, Gilead reported a very low effective tax rate of 15.2%.
Updating The Outlook
Ahead of the report, Gilead guided for full year sales of $11.3-$11.5 billion excluding the contribution from Sovaldi.
By now, Gilead sees full year sales of $21 to $23 billion. Non-GAAP gross margins are seen around 85-88%, resulting in gross profits of about $19 billion. One needs to subtract $2.3-$2.4 billion in R&D as well as $2.3-$2.4 billion in selling, general and administrative expenses, resulting in operating earnings of $14.3 billion or about $14 billion after interest payments.
Applying a 19% effective tax rate results in after-tax earnings on a non-GAAP basis of $11.3 billion. This will result in diluted non-GAAP earnings of about $6.80 per share, or closing to $6.15 on a GAAP basis given the expected discrepancy between GAAP and non-GAAP earnings.
The guidance is a bit disappointing. At the midpoint of the guidance, sales of $22 billion implies that second half year sales will be lower compared to the first half of the year. Analysts were looking for a full year sales guidance of $22.5 billion, but some noted that Gilead could be deliberately conservative, given the outcry of politicians, health care providers and related parties regarding the high cost of Sovaldi.
Adding To The War Chest
The huge success of Sovaldi is resulting in a huge build up in the cash position of the firm, which rose to nearly $9.7 billion by the end of the quarter.
Total long-term liabilities, which have not been specified stood at $8.5 billion, while I did not see general ¨liabilities¨ being split out in general long-term liabilities as well as outstanding debt. By the end of the first quarter, Gilead still operated with a net debt position of about $3.5 billion but it is likely that this financial position has improved along the second quarter.
Trading at $90 per share, equity in Gilead is valued at roughly $150 billion given the 1.66 billion shares outstanding. This values equity in the business at about 6.8 times annual sales projected for this year and roughly 13-14 times GAAP earnings, assuming annual earnings of around $11 billion.
Long-Term Success Story
Even before Gilead marketed the hugely successful Sovaldi drug, shares have seen huge returns over the past decade. Trading at just a few dollars a decade ago, shares have long traded around $20 until the start of 2012 when shares started their impressive march upwards.
This was already driven by the portfolio of many other drugs, which have grown the business steadily from $1.3 billion in 2004 to sales of $11.2 billion last year, which hardly saw any contribution from Sovaldi. On the back of this drug, sales are expected to double this year, while earnings will continue to explode.
This does not mean that Gilead is leaning back. Instead the company announced the accelerated approval of Zydelig by the FDA which is used in combination with Roche's (OTCQX:RHHBY) Rituxan drug to cure three types of blood cancer.
Sovaldi drove the second quarter results delivering both a big beat on its individual drug sales as well as overall revenue and earnings projections.
While patients and doctors are very happy with the results, the price tag of $80,000 for a 12-week cure continues to draw a lot of controversy. The company stresses indeed that Sovaldi is a cure, and saves a lot of subsequent healthcare costs in the years to come, which would have otherwise occurred. At the same time, it dramatically improves the quality of life of patients, as strongly advocated by COO John Milligan.
So far, doctors have prescribed Sovaldi to 80,000 patients of which some 70,000 in the US. According to the US Centers for Disease Control and Prevention, some 2.7 million people in the US suffer from the disease which means only 2-3% of the target population has been treated so far.
Of course, the very fat profit margins are attracting competition. Merck (NYSE:MRK) acquired Idenix for $3.85 billion earlier this year to boost its ambitions in the field while AbbVie (NYSE:ABBV) is another potential future competitor in the market for Hepatitis C drugs.
As such, I am making the trade-off between the rapid growth and very high anticipated earnings, with the outlook for the year most likely being conservative. On the other hand is competition and continued pressure on pricing from many participants in the system.
If growth continues and Gilead would command just a market valuation multiple at 17-18 times earnings, while it could post earnings of $12 billion, a price target of $125 could easily be justified.
On the other hand, competition and prices could put the company under pressure. Even if prices would have to come down, Gilead could easily cut prices by 25%, while maintaining earnings at $9 billion at this rate. In such a scenario, shares would trade at 17-18 times multiple, which is in line with the market. This and the large untapped market potential gives me some comfort in the current valuation.
I remain long-term optimistic, holding on to my position.
Disclosure: The author is long GILD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.