Gilead Sciences Looks Like A Contrarian Short

Aug.12.14 | About: Gilead Sciences, (GILD)

Summary

All the potential good news is already priced in Gilead's stock.

Emerging markets will not have any significant impact on Sovaldi sales.

Impending competition from the companies like AbbVie can hurt Gilead Sciences.

At present valuations, Gilead looks like a contrarian short.

A large number of investors and analysts think that Gilead Sciences (NASDAQ:GILD) is one of the best and the safest stock to buy. Of the 30 analysts covering the stock, 26 rate it a Buy while four recommend it a Hold. However, I think Gilead Sciences is a contrarian short and here's why.

Good news already priced in the stock

Gilead Sciences recently released its quarterly earnings, easily surpassing analysts' estimates on revenue as well as earnings. As reported by The Wall Street Journal:

"Total revenues for the second quarter of 2014 increased to $6.53 billion compared to $2.77 billion for the second quarter of 2013. Product sales for the second quarter of 2014 increased to $6.41 billion compared to $2.66 billion for the second quarter of 2013. Net income for the second quarter of 2014 was $3.66 billion, or $2.20 per diluted share compared to $772.6 million or $0.46 per diluted share for the second quarter of 2013. Non-GAAP net income for the second quarter of 2014, which excludes acquisition-related, restructuring and stock-based compensation expenses, was $3.93 billion, or $2.36 per diluted share compared to $839.7 million or $0.50 per diluted share for the second quarter of 2013."

The beat was primarily driven by the success of Gilead's Hepatitis C drug Sovaldi. Sovaldi, which cures Hepatitis C virus, or HCV, costs $84,000 for a 12-week, 1 pill per day regimen. In addition, a ribavirin treatment in combination with Sovaldi puts HCV cure price in the range of $150,000. As a result of the high cost and the increasing patients infected with HCV, Sovaldi raked in $3.5 billion in quarterly sales.

Usually, this kind of blowout quarter is accompanied by a steep rise in share price, however Gilead's shares have remained flat. This clearly indicates that a lot of the good news is already priced in and the company has many risks ahead of them, which the market isn't appreciating right now. Let's take a look at these risks.

Emerging market won't drive sales

Recent reports state that there are over 300 million people infected with HCV globally out of which 3.9 million people are from the U.S. The U.S. is Gilead's primary growth market however the number of new Hepatitis C cases diagnosed each year has been progressively declining. A recent survey shows that the number has fallen to almost 2.2 million in 2014.

Moreover, emerging markets aren't expected to add considerably to Gilead's revenue as people will not be able to afford $84,000 for treatment in smaller countries. This is evident by the fact that Gilead recently signed deals with Egypt and India to sell Sovaldi at 99% discount. Morgan Stanley analysts highlighted this issue and said:

If 200k/yr pts are treated it would likely only add 3-4% to peak HCV revs… While we acknowledge that the bull case of emerging market (NYSE:EM) revenues backstopping any declines in developed market revenues from volume declines or pricing/competition pressure is possible given the sig. number of EM pts, we believe both the cost implications (even with Sovaldi at 1% of the US price) and infrastructure demands will slow any sig. revenue contribution from EM countries. That said, we will continue to watch EM developments as significant penetration in EMs would have a positive impact on our HCV tail estimates.

All in all, Gilead primarily depends on the U.S. HCV market to drive its sales.

Increasing competition

Right now, Gilead Sciences has the HCV market to itself and as a result, it is witnessing soaring sales. However, with the impending arrival of AbbVie's (NYSE:ABBV) own Hepatitis C regime, Gilead sales may drop considerably. Earlier in 2014, AbbVie released results on its combination hepatitis C regime showing promising Phase III data for its three-drug combination treatment with ribavirin. AbbVie expects to launch the therapy by the end of 2014.

In April, a study showed that AbbVie's 3 drugs--specifically ABT-450, ABT-267, and ABT-333-when taken in combination with ribavirin showed efficacy of 92% among patients in the advance stages of the liver infection, after just 12 weeks of treatment. AbbVie's regime is just as good as Gilead, and the FDA has already granted it a priority review, which means the drug can hit the market before the end of 2014.

Although Gilead has the early mover's advantage, AbbVie can deteriorate Gilead's sales by selling its regime at a lower price.

Conclusion

As I mentioned above, all the good news is already priced in Gilead's stock and the impending competition from AbbVie will definitely hurt Gilead sales. Although every analyst thinks Gilead is a safe buy, I think it is a short candidate due to the aforementioned reasons.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.