Gilead Sciences, Inc. (NASDAQ:GILD) reported fourth-quarter and full-year results on Tuesday, beating estimates once again. I'll take a look at what you need to know about last year's results and this year's outlook.
Numbers recap 2015 this
In the fourth quarter, Gilead grossed revenues of $8.5 billion, which is a sixteen percent increase over the prior year's quarter. With net income coming in at $4.9 billion (up 26 percent yoy), the company's earnings per share of $3.32 (up 37 percent yoy) beat estimates by $0.32.
Full-year revenues totaled $32.6 billion (up 31 percent yoy), net income for 2015 was $19.2 billion (up 44 percent yoy) and earnings per share came in at $12.61 - up 56 percent over the prior year.
What was good?
Gilead's Q4 results were great, in combination with very strong results for the first three quarters of 2015, this allowed for all-time highs in revenues, net income, EPS and cash generation.
I like that Gilead did not only grow on a year on year basis, but even on a quarter to quarter basis the company keeps growing: In Q3 Gilead grossed revenues of $8.3 billion, which means that quarterly revenues increased by three percent in just three months. This shows that Gilead is not yet topping out, the company remains in growth mode. Gilead's revenue increase over the third quarter was based on higher Harvoni and Sovaldi sales, as well as increases in Truvada and Complera sales - Gilead's HCV franchise as well as the company's HIV franchise keeps growing.
When we look at revenue growth in comparison to the prior year, we see that the main contributors were International Harvoni sales (Europe grossing $600 million and other International (mainly Japan) grossing $1.1 billion), as well as broad growth for Gilead's HIV franchise (with the exception of Atripla).
In the past I have stated that International HCV revenues would become the primary growth driver for Gilead, and it looks like I was right: With $2.53 billion in Harvoni and Sovaldi sales, International HCV revenues now contribute slightly more than fifty percent of Gilead's total HCV revenues. This is beneficial for the company because it allows for continuous growth in markets where the drugs got just recently rolled out (e.g. Japan), and it also lowers the reliance on the US market - with political blowback in the US (due to drug pricing) it is a strong positive for the company if its US business has a less dominant position in the future.
Gilead's non-antiviral products keep growing as well: Although they have just a minor position (with HCV and HIV being a lot bigger) Gilead is raising a compelling number of other franchises that are often overlooked: Letairis and Ranexa are both not too far from a $1 billion annual run rate (and are both still growing), and Zydelig's revenues are up more than 100 percent yoy.
The next positive is Gilead's continuing excellence when it comes to cash generation: In 2015 the company produced operating cash flows of $20.3 billion, with very low capex requirements the company is able to pay out most of that cash to its owners. During 2015, Gilead repurchased shares for $10.0 billion and paid out dividend totaling $1.9 billion. The share repurchases are responsible for the fact that the company's EPS are growing at a much faster rate than its net income (see Q4 EPS growth of 37 percent vs net income growth of 26 percent). During its earnings call, Gilead also announced a new share repurchase authorization (for $12 billion), enough to shrink the share count by another ten percent (using current market capitalization of $119 billion).
Gilead's dividend, which yields 2.1 percent right now, will be increased in the next quarter: During the earnings call, management stated that the quarterly dividend would grow to $0.47, which means a ten percent increase and which gives the company a forward dividend yield of 2.3 percent. I personally would have been happier with an even bigger dividend increase, but a double digit growth rate is not too bad and Gilead's current yield is on par with the broad market's yield right now.
Gilead has built up a lot of cash over the last quarters - at the end of December the company's cash balance stood at $26 billion, or more than twenty percent of the company's market capitalization. It will be interesting to see how management decides to use this money, I believe an acquisition in the near future is not unlikely. Many called for Gilead to make an acquisition in prior quarters, but with the biotech sector selling off heavily over the last months we can say that the company was smart and did the right thing by waiting for better valuations.
Gilead's pipeline progress during the quarter was good as well, the company got a couple of drugs approved (e.g. the company's next level HIV drug Genvoya in the EU) and is on track to get its next level HCV drug (a combination of sofosbuvir and velpatasvir) approved. This HCV drug will be able to cure HCV infections of all genotypes, which makes genotype testing unnecessary. Additionally, Harvoni got label extensions (e.g. for use by patients with HCV genotypes 4,5 and 6; approval for use by patients with HIV co-infection).
What was negative?
Apart from Gilead's share price movement (which is not controlled by management) there isn't much investors can complain about, I believe.
Outlook for 2016
Gilead's management announced that the company was looking for product sales of $30 billion to $31 billion in 2016, which would represent a small decrease over 2015's $32 billion in product sales. At first this sounds like a small negative, but we have to account for the fact that Gilead's management is very conservative with its forward guidance.
Let's look at what management was guiding for in early 2015: As you can reread here, Gilead's original guidance for 2015 was for product sales of $26 billion to $27 billion, during the year management raised its guidance several times. We see that actual product sales were 21 percent higher than the company's guidance at the beginning of the year. I don't think that this year's guidance beat will be that high again, but I am sure management gave us conservative numbers again, which means that we will likely see guidance increases rather than guidance decreases in the next quarters, and I wouldn't be surprised if 2016's actual product sales come in above 2015's $32 billion. The sales trends we have seen over the last quarters (with continuous quarter to quarter growth) support the assumption of revenues not dropping all of a sudden.
With International markets showing very strong growth rates and new improved products (Genvoya and Gilead's new pan-genotype HCV drug) on the market (or about to get on the market) as well as growth from Gilead's other (non-antiviral) products, I don't see a reason why this year's revenues should come in below last year's number - and even if revenues would decline slightly, the company's extremely low valuation does already account for such a possibility.
I feel encouraged by Gilead's results: The company keeps growing (even on a quarter to quarter basis), International HCV is growing very fast, the company's cash generation and shareholder returns remain very high, and with more than $26 billion in cash the company could easily make a meaningful acquisition in the future.
Guidance is likely on the conservative side (Gilead's management has a thing for rising guidance during the year), and I believe revenues will grow again this year.
Gilead's valuation remains extremely low, I believe this is not justified and makes the company's shares very attractive at the current price.
Disclosure: I am/we are long GILD.
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.