Gilead Sciences Has Surprised Again

| About: Gilead Sciences, (GILD)

Summary

Gilead delivered strong fourth quarter and full year 2015 financial results, which beat EPS expectations by a big margin of $0.33 (11.0%).

Gilead forecast 2016 revenue of $30 billion to $31 billion, slightly below its 2015 revenue.

Although the guidance does not indicate sales growth, it should not be considered disappointing, in my opinion, given the company's history of conservatism.

Gilead's HCV drugs sales can still grow due to innovation in its drugs for treating patients across all genotypes, and due to new markets especially in Europe and Japan.

The average target price of the top analysts is at $119.33, up 44.3% from its February 02 close price, which appears reasonable, in my opinion.

Yesterday, on February 02, Gilead Sciences (NASDAQ:GILD) reported fourth quarter and full year 2015 financial results, which beat EPS expectations by a big margin of $0.33 (11.0%). Fourth-quarter revenue rose 16% to $8.51 billion from a year earlier, compared with an average analyst prediction of $8.11 billion. Gilead has shown significant earnings per share surprise in eight of its last nine quarters, as shown in the table below.

Data: Yahoo Finance

In a conference call, John C. Martin - Chairman and Chief Executive Officer, said:

2015 was an exceptional year for Gilead, with progress in a number of therapeutic areas, most notably in the development of TAF-based therapies for HIV and hepatitis B and new agents for the treatment of liver disease. Gilead is entering 2016 from a position of financial strength; a portfolio of 20 marketed products that address significant unmet medical needs, including Genvoya, the most recent product to be introduced; and growing pipeline with multiple programs for which milestones are expected during the coming year, including regulatory decisions on two products for HIV and one each for HCV and HBV.

In the report, Gilead provided its full year 2016 guidance. Gilead forecast 2016 revenue of $30 billion to $31 billion, slightly below its 2015 revenue. Although the guidance does not indicate sales growth, it should not be considered disappointing, in my opinion, given the company's history of conservatism. In 2015, for instance, guidance was initial $26-$27 billion, and gradually increased to $30-$31 billion.

Click to enlarge

Source: Fourth Quarter 2015 Earnings Slides

Also yesterday, Gilead announced that the company's Board of Directors declared a cash dividend of $0.43 per share of common stock for the first quarter of 2016. The first quarter dividend is payable on March 30, 2016, to stockholders of record at the close of business on March 16, 2016. Also, the Board authorized an increase of 4 cents (10%) in the company's quarterly dividend program, beginning in the second quarter of 2016. The increase will result in a quarterly cash dividend of $0.47 per share of common stock for the second quarter of 2016. Gilead started to pay a dividend in the second quarter of 2015. The current annual dividend yield is at 2.08%, and the payout ratio is only 7.5%. The Board of Directors also approved the repurchase of an additional $12 billion of the company's common stock to commence upon completion of the company's existing $15 billion repurchase program authorized in January 2015.

As of December 31, 2015, Gilead had $26.2 billion of cash, cash equivalents, and marketable securities compared to $11.7 billion as of December 31, 2014. During 2015, Gilead generated $20.3 billion in operating cash flow, utilized $10.0 billion to repurchase 95 million shares of its stock and paid cash dividends of $1.9 billion, or $1.29 per share.

Some investors might assume that the fact that the company returns such a significant amount of cash to its shareholders indicates that its growth drivers are limited. However, in my opinion, returning $11.9 billion to shareholders while generating $20.3 billion in operating cash flow is not exaggerated, and Gilead has still enough resources to make a significant acquisition when the opportunity arises. What's more, the company is increasing its research and development expenses from $3.0 billion in 2015 to $3.2-$3.5 billion in 2016.

Hepatitis C Treatment Product Sales

Harvoni and Sovaldi sales accounted for 59.5% of total product sales in 2015, and 50.7% in 2014. Investors have worried that sales of Gilead's blockbuster HCV drugs would stop growing due to competition from AbbVie's (NYSE:ABBV) Viekira Pak HCV drug and from Merck's (NYSE:MRK) Zepatier drug for the treatment of hepatitis C virus that was approved last week by the U.S. Food and Drug Administration. That explains the steep drop of GILD's stock price of 33% from its June 2015, all-time high price of $123.37. However, in my opinion, Gilead's HCV drugs sales can still grow due to innovation in its drugs for treating patients across all genotypes, and due to new markets especially in Europe and Japan.

Let's first examine Gilead's HCV drugs sales in the last two years. HCV products sales were $4,892 million in the fourth quarter of 2015 compared to $3,839 million in the fourth quarter of 2014. That is quite a high growth of 27.4% year-over-year. However, sales in the last quarter were only 2% greater than the previous quarter sales. Gilead's HCV drugs sales in the last eight quarters are shown in the chart below.

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Source: company's reports

HCV products sales in the U.S. were $2,367 million in the fourth quarter of 2015 compared to $3,179 million in the fourth quarter of 2014. That is a decline of 25.5% year-over-year. Sales in the last quarter were also 26.8% less than in the previous quarter. Harvoni and Sovaldi sales in the U.S. have dropped after insurers have been demanding discounts as high as 45% off the drug's prices for a course of treatment - $94,000 for Harvoni and $83,000 for Sovaldi. Some insurers and government health programs also are limiting the number of new patients they clear to start treatment. Gilead's HCV drugs sales in the U.S. in the last eight quarters are shown in the chart below.

Click to enlarge

Source: company's reports

HCV products sales in Europe were $846 million in the fourth quarter of 2015 compared to $542 million in the fourth quarter of 2014. That is an increase of 56.1% year-over-year. However, sales in the last quarter were 2.6% less than in the previous quarter. According to the company, a number of countries in Europe have volume-based incentives for Sovaldi and Harvoni, which serves to encourage a higher number of patients being treated. In quarter four, the growth in revenues did not match the growth in patient starts because of the impact of certain volume-based agreements combined with adverse foreign-exchange movements. Gilead's HCV drugs sales in Europe in the last eight quarters are shown in the chart below.

Click to enlarge

Source: company's reports

International sales, mostly Japan, were $1,679 million in the fourth quarter of 2015 compared to $118 million in the fourth quarter of 2014. That is an increase of 1322% year-over-year. Also, sales in the last quarter were 141% greater than in the previous quarter. In Japan, hepatitis C revenues for the fourth quarter were $1.4 billion. Since the launch of Sovaldi in May 2015 and the launch of Harvoni in September 2015, sales of $1.9 billion have been generated in Japan with Harvoni representing more than $1 billion of that number. Gilead's HCV drugs international sales in the last eight quarters are shown in the chart below.

Click to enlarge

Source: company's reports

Click to enlarge

Source: Fourth Quarter 2015 Earnings Slides

All in all, according to Gilead, patient starts in the U.S. will likely be similar in 2016 to 2015 levels while the Europe numbers will continue to grow as early launched markets stabilize and new markets ramp up treatment. In Japan, patient numbers are difficult to predict because launches are still in the early stages. In the rest of the world, the company is excited to reach new patients in several new markets, notably in Asia-Pacific and in Latin America.

In my view, there is still high growth prospects for Gilead's HCV drugs. While worldwide, an estimated 185 million people are infected with the liver-destroying virus, only about 770,000 patients have been treated with the drugs to date.

Click to enlarge

Source: Fourth Quarter 2015 Earnings Slides

What's more, Gilead continues to innovate in HCV, and recently unveiled a series of studies called the ASTRAL studies, where it looked at a next generation NS5A inhibitor called velpatasvir, in combination with sofosbuvir provides a very robust pangenotypic options for patients. According to Gilead, it solved very high rates of sustained virologic response [SVR], as high as 99% in ASTRAL 1 and 2, 95% in ASTRAL 3, which is genotype 3, still the hardest genotype to cure. This provides a very consistent basis for treating patients across all genotypes, and will be a very important option for patients in the future. The company filed the New Drug Application [NDA] last October, and it was given priority review in the United States of June 28 this year. The new development could increase the market for Gilead's HCV drugs significantly.

Click to enlarge

Source: Fourth Quarter 2015 Earnings Slides

Summary

Gilead delivered strong fourth quarter and full year 2015 financial results, which beat EPS expectations by a big margin of $0.33 (11.0%). Fourth-quarter revenue rose 16% to $8.51 billion from a year earlier, compared with an average analyst prediction of $8.11 billion. Gilead has shown significant earnings per share surprise in eight of its last nine quarters. Gilead forecast 2016 revenue of $30 billion to $31 billion, slightly below its 2015 revenue. Although the guidance does not indicate sales growth, it should not be considered disappointing, in my opinion, given the company's history of conservatism. In 2015, for instance, guidance was initial $26-$27 billion, and gradually increased to $30-$31 billion. Gilead's HCV drugs sales can still grow due to innovation in its drugs for treating patients across all genotypes, and due to new markets especially in Europe and Japan. In my opinion, the recent drop in its price creates an excellent opportunity to buy GILD's stock at an attractive price. According to TipRanks, the average target price of the top analysts is at $119.33, up 44.3% from its February 02 close price, which appears reasonable.

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.