I Put Gilead Away

| About: Gilead Sciences, (GILD)

Summary

I bought a put in the name about a month ago to hedge my long position and it looks like it will pay off.

The company reported a dismal quarter and was down 5.5% in after-hours trading.

The company missed estimates on the top and bottom lines as well as revenue estimates for its Hep C products.

Gilead Sciences (NASDAQ:GILD) stated first quarter earnings after the bell on Thursday and it was not good news. The company missed on the top and bottom line as well as Hepatitis sales. The bottom line missed by reporting $3.03 while Wall Street was looking for $3.15. Revenue for the quarter came in at $7.79B versus analyst estimates of $8.12B. The combined worldwide Hepatitis sales number came in at $4.29B against estimates of $4.6B. The company however did confirm it will still achieve the guidance for 2016 it provided earlier in the year. The stock was down 5.5% in after-hours trading on 13% of normal trading volume.

So what happened you might ask? The company actually did treat more patients, however, they were offering steeper discounts. The bigger discounts may have come because of Merck's (NYSE:MRK) Zepatier which was approved during the first quarter of this year. Patients were also seeing less treatment durations. These are both very heart-warming, feel good stories if you are a human. But very bad storylines if you are an investor. The company says that there are still about 3M patients in the US which are untreated of which half still do not know that they even have the viral infection. Obviously the company was trying to pitch the silver lining amid a dismal quarter with that bit of information.

The pressure on the drug pricing may be an industry wide phenomena as well, not just a competitor related issue. Just take a look at Valeant (NYSE:VRX), the other day they were in Washington and could not come up with a product name that they did not raise the price for. The rest of the industry is taking their cue from Valeant's woes to lower their drug prices during the past quarter. Gilead has indeed reaped the benefits of high margins for their Hep C products thanks to high prices for quite some time. With those high margins in Hep C Merck and Abbvie (NYSE:ABBV) decided to join the party, causing prices to come down over time.

The company has roughly $21B of cash on the balance sheet to spend and with three deals announced just earlier in the day you can rest assured that Gilead will not be resting on its laurels when it comes to the topic. The three deals which were announced earlier were Abbott (NYSE:ABT) buying St. Jude (NYSE:STJ), Sanofi (NYSE:SNY) going hostile on Medivation (NASDAQ:MDVN), and Abbvie announcing a deal for Stemcentrx. Gilead said on the conference call that they are looking to buy in their core competencies such as cancer and hepatitis B. The delay of making a big deal is the only thing keeping this stock down at this point in time. They need to buy something that is going to be provide revenue growth and quick at this juncture.

The main focus on Gilead these days by investors is whether or not the company will use its war chest to scoop up some tattered company thanks to the deep discounts offered up in the industry due to the political saber rattling from back in September. One would think that after the breakup of the Pfizer (NYSE:PFE)/Allergan (NYSE:AGN) deal that all deals in the drug manufacturing space were over for a while but that is not the case as evidenced by the three cases I mentioned in the previous paragraph.

The drug manufacturers have been beaten up like pizza dough over the past six months by Bernie Sanders, Hillary Clinton, and Donald Trump. But I think with former Valeant CEO Mike Pearson appearing before Congress the other day that the worst might be over for the entire industry. The larger companies like Gilead can begin to consolidate the industry, bringing scale to much smaller companies that don't have the firepower to expand.

Yes the quarter was a dismal one for Gilead with the top and bottom lines missing analyst estimates. But I believe the rest of the industry is poised to move higher right now and Gilead should take advantage of buying something right now or else it will be an outlier. If the company doesn't act soon it may lag the rest of its peers. I have been long the name for quite some time now but haven't cared to hold it since February this year. Hence I bought a put to hedge my long position and have just been waiting to sell the name, unfortunately I waited far too long and now am underwater on the name if the after-hour pricing holds on Friday. Although I may be underwater on the common shares I should be in line to make quite a bit of money off the put I bought a month ago to hedge the position. I will make a decision in the next couple of days on what to do with my Gilead holdings.

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long GILD, ABBV, AGN.

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.