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Summary

  • Gilead Sciences, a pharmaceuticals company specializing in drug discovery, development, and commercialization, has seen considerable success recently: its strong first- and second-quarter results make its 2014 analyst rating primarily bullish.
  • However, the bulk of Gilead’s 2014 sales triumph is attributable to Gilead’s spotlight hepatitis C drug Sovaldi, which generated around $2.3 billion in one quarter and is still selling well.
  • The fact that much of Gilead’s success is stemming from a single drug should be reason for caution, particularly in light of emerging questions about Sovaldi’s sales sustainability.
  • In the short term, Gilead’s refusal to provide full-year guidance for 2014, its low pricing in India and Egypt, its $1000 price-per-pill, and other companies’ competing products are also troubling.
  • I Know First algorithmic forecast predicts a bearish trend for the 1-month and 3-month time frames, which coincides well with the potentially problematic aspects of the stock discussed above.

Consult the Internet concerning Gilead Sciences (GILD), and you will presently find nothing but bulls. Barron's advises us not to worry about a pricing war, The Fool gives us three reasons Gilead stock could rise, Ticker Report tells us that the company has received a consensus recommendation of "Buy" from analysts, and countless others, like Tech News and Zacks, cite just how quickly Gilead is growing. The sentiment is understandable, particularly in view of Gilead's published press releases for the first and second quarters of 2014. And yet, there exist risks which entirely positive analyses are overlooking.

Company Profile

Gilead Sciences is a company specializing in drug discovery, development, and commercialization. Specifically, in recent years, it has focused primarily on antiviral drugs for HIV, hepatitis B, and influenza; this year, too, it has released Sovaldi, a drug geared at combatting hepatitis C. Headquartered in Foster City, California, Gilead has, by now, established operations in North America, Europe, and Australia, and had 4000 full-time employees as of 2009. In the same year, it was also labelled one of the fastest growing companies in America by Fortune, and one of America's top companies to work for by Forbes. In 2011, GILD's acquisition of Pharmasset took the company to even greater heights - Forbes called the move "one of the best pharma acquisitions ever"; nearly single-handedly, buying Pharmasset propelled Gilead forward, making it the number four ranked drug company in Forbes's list by 2013. Additional acquisitions, like CGI Pharmaceuticals, Arresto Biosciences, Calistoga Pharmaceuticals, and YM Biosciences, helped GILD expand its offerings to include more diverse therapies (e.g., those geared at treating myeloproliferative disorders, a diversity of cancers, and inflammatory disorders). Most recently, as was previously mentioned, GILD generated even further success by introducing Sovaldi, a hepatitis C therapy, to the market; this drug alone, sold for the very first time in the first quarter of 2014, has been cited by analysts as the key to GILD's positive outcomes this year.

The Advantages

It would be incorrect to say that the wealth of positive sentiment surrounding GILD is entirely misplaced. In fact, if one takes just a quick look at Gilead's published press releases for the first and second quarters of 2014, progress appears picture-perfect. Specifically, in the first quarter of 2014, Gilead completely annihilated analysts' estimates of its earnings, posting non-GAAP earnings of $1.48 per share. Total revenues increased to $5.0 billion from $2.53 billion in the first quarter of 2013; product sales also increased to $4.87 billion from $2.39 billion, and non-GAAP net income went up, too, going from $801.9 million in the same quarter of 2013 to $2.49 billion this year. Largely due to sales of Sovaldi, which launched in 2013, antiviral product sales shot upwards, increasing to $4.51 billion in the first quarter from $2.06 billion in the first quarter of 2013. Cardiovascular product sales increased, and the only expenses that went up were, according to GILD, increasing due to the progress of GILD's clinical studies in oncology and HIV.

In the second quarter of this year, GILD continued to make significant progress; again, Sovaldi was primarily responsible. By this time, as GILD points out on its website, the drug has been prescribed to more than 80 000 patients in Europe and the States; the medical community, in other words, has been content with it. Specifically, in the second quarter of 2014, GILD's U.S. product sales increased to $4.8 billion from $1.64 billion in Q2 of 2013, and Europe product sales increased to $1.31 billion from $818.2 million. GILD's antiviral product sales, due to Sovaldi, went up as well, with unrelated cardiovascular product sales also increasing. Operating expenses did go up as well, but again, GILD accounts for this, noting that non-GAAP research and development expenses increased "primarily due to increases in headcount and other costs to support expansion of our R&D activities".

This growing revenue has not gone unnoticed by analysts. Look anywhere. NASDAQ, Yahoo! Finance, Market Watch - almost every major analyst firm's or association's current recommendation is "Buy":

Figure 1. NASDAQ and Yahoo! Finance analysts rank GILD a 1.7, where 1.0 is a strong buy, and 5.0 is a strong sell.

Figure 2. Market Watch also places GILD as a buy.

The Disadvantages

Despite GILD's strong results and analysts' standing ovations, the company poses certain potential problems to investors that should not be overlooked.

Firstly, there is the fact that most of the company's strength these past two quarters has come from Sovaldi, its star hepatitis C drug. Certainly, Sovaldi sales went to $2.3 billion in its very first full quarter on the market; that's impressive. Concurrently, sales of Gilead's HIV treatment Stribild went up as well; that, too, is helpful to the company. However, relying on strong sales of solely a few products can be a dangerous strategy for any business: if competition rises or the market changes in some other sense, and one or both of Stribild and Sovaldi begin to see significantly less positive reception, then Gilead and involved investors could suffer considerably.

It also does not appear that Sovaldi is so unique as to be immune to competition. Giants like AbbVie, Enanta Pharmaceuticals, Bristol-Myers Squibb, and Merck all have similar products lined up to enter the market; if these new options present themselves as slightly less effective but massively less expensive than GILD's Sovaldi, GILD may no longer see such startlingly high sales. Two of the aforementioned companies are officially filing a New Drug Application, so their products may appear on the market relatively soon. Granted, this is more of a long-term concern than one to be had at present, given that this competition is to be introduced next year at earliest, but it is a fact worth keeping in mind for the future.

Further, even if other companies do not produce competitively priced treatments, problems may arise for Sovaldi consumption in and of itself. As The Fool's Mark Reeth and Michael Douglass point out, customer pushback is a realistic problem for Gilead. While Sovaldi has near-100% effectiveness, and while it is combatting a disease that causes widespread damage if left uncured, its entire 12-week treatment costs approximately $90 000, with each pill at around $1000 - a price some may consider beyond them. In fact, Gilead is actually under investigation by the U.S. Senate Finance Committee for this pricing choice: claiming that the steep cost of Sovaldi will heavily impact Medicare, Medicaid, and other federal spending, officials, pharmacy benefits firms, and Doctors Without Borders alike are expressing disapproval over Sovaldi's $1000-per-pill cost, citing corporate greed as its sole motivator. To make things worse, the idea that this admittedly very price is unjustified is furthered by the fact that GILD has been selling Sovaldi for lower prices elsewhere. In the U.K., Sovaldi will cost solely $57 000 a course; in Egypt and India, just $900.

There is also the fact that GILD's patient base may not always stay as large as it is. Payers like UnitedHealth Group and clinicians have suggested that, especially in view of the price of the treatment, Sovaldi may see a decrease in patient volume after some time. While GILD disagrees, noting that only half of targeted physicians have begun prescribing the drug, and a large number of patients without private insurance still exist to be treated, this is another consideration to keep in mind for the future, particularly in the face of more cost-effective treatments' being introduced.

Finally, GILD itself introduced cause for suspicion earlier this year when it refused to provide full year guidance - i.e., a full year's worth of projected expected results - for Sovaldi. Despite amazing sales in the first quarter of 2014, the company did not elevate its total estimated yearly sales projection, suggesting that, for one reason or another, GILD itself may still not be certain about just how sustainable Sovaldi sales will be throughout the year.

Algorithmic Perspective

I Know First uses an advanced self-learning algorithm based on artificial intelligence, machine learning, and artificial neural networks to predict the flow of money in almost 2000 markets from 3-days to a year. This algorithm provides traders with a trend they can use to identify when to enter and exit the market; though it may be used for intra-day trading, the predictability of this trend becomes stronger in 1-month, 3-month, and 1-year forecasts; as such, it can - when coupled with traditional analysis and careful reasoning - effectively be used to analyze the value of such stocks as GILD.

In fact, I Know First has previously successfully predicted GILD's progress on several occasions. Specifically, I Know First recommended a strong bullish position for GILD for a period of three months, from April 21st to July 21st, 2014. Comparing this forecast to GILD's actual progress (Figure 3), we see that I Know First successfully predicted GILD's progress over the course of this period: the stock performance was +26.94%.

Figure 3. I Know First algorithmic forecast successfully predicted GILD's successes April through July. Our algorithmic stock forecast is shown on the left, and GILD's performance is profiled on the right. GILD is boxed in pink on the left.

Further, I Know First has managed to accurately predict GILD's daily performance across five months, as evidenced by the below chart (Figure 4).

Figure 4. I Know First's predictions for GILD over the course of five months, from March 1st 2014 through August 2nd 2014. Each point on the chart is taken from the actual daily forecast published that morning; actual price over time is shown in thick blue, and the prediction line is a dashed red.

I Know First has not solely been successful in generating realistic short-term predictions, however - we have also managed to accurately forecast GILD's year-long performance, as shown below (Figure 5).

Figure 5. I Know First's year-long forecast for GILD, running from August 23rd 2013 to August 23rd 2014. The algorithmic forecast is shown on the left, while the stocks' actual performances are shown on the right. As one can see, GILD's strongly bullish forecast was accurate: its actual performance was +73.47%. GILD is boxed in pink on the left.

The new forecast generated by the I Know First algorithm, updated on August 19th, is shown below (Figure 6). Bright green signifies a highly bullish signal; light green also indicates that the forecast is bullish, but not as strongly so. Bright red, in turn, signifies a bearish forecast; correspondingly, light red indicates a bearish forecast as well, but not as negative a forecast. Each compartment contains two numbers: the strength of the signal itself (represented by the number in the middle of each box, to the right), and its predictability (found in the bottom left corner, this is the approximate level of confidence the algorithm has in the forecast). Taking all this into consideration, the ticker symbol for Gilead Sciences - "GILD" - may be seen as strongly bearish in the 1-month frame, and remains strongly bearish across the 3-month frames; this and predictability should be taken into consideration when this algorithmic perspective is used to inform traditional analytic tools.

Figure 6. I Know First's most recent 1-month and 3-month forecasts for GILD, updated August 19th 2014. GILD, boxed in blue, seems to be strongly bearish in these time frames.

This strong bearish forecast for the short term coincides well with doubts about the sustainability of GILD's Sovaldi, despite its successful second-quarter earnings. Despite analysts' mean "Buy" recommendation, it may be wise to consider whether GILD is certain to be successful in the short term, given I Know First Research's success in its last GILD-related algorithmic prediction.

Conclusion

While GILD appears essentially flawless at the moment, it has several disadvantages. For one thing, in the short term, GILD has based most of its success on sales of Sovaldi: a very effective - but highly overpriced - hepatitis C drug that is not without potential competition. While Sovaldi has seen impressive sales in the first and second quarters of 2014, and while GILD's other antiviral products continue to enjoy success, the U.S. government, patients, and charitable organizations alike are questioning the validity of GILD's $1000 price-per-pill, particularly in light of its variable pricing plans, which differ from country to country. Further, GILD itself appears uncertain as to whether Sovaldi sales will remain sustainable; its own decision to avoid broadcasting high year-long sales projections is reflective of the difficulty inherent to gauging an entire company's success on the basis of solely one or two products' reception. These disadvantages, in combination with I Know First Research's proven ability to predict GILD's success, indicate that investors would be wise to at least consider that even GILD may have its imperfections, and that even GILD may be bearish in the 1-month and 3-month time frames.

Business relationship disclosure: I Know First Research is the analytic branch of I Know First, a financial start-up company that specializes in quantitatively predicting the stock market. This article was written by Sophia Glisch, an I Know First intern, and edited by Daniel Barankin. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Source: Gilead Sciences: Despite This Year's Triumphs, Watch Out For Weaknesses - An Algorithmic Perspective