Gilead Sciences' Stock Forecast: Algorithmic And Fundamental Analysis

| About: Gilead Sciences, (GILD)
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Summary

Gilead Sciences has had one of its most successful years, with growth in Q3 2014 exceeding 100% growth over last year's Q3.

Sovaldi currently profits on being the first to market; the single product is currently responsible for almost 50% of the company's revenues.

The current product portfolio poses a high risk, and is dependent on competitors' failures/successes in the upcoming months.

I Know First algorithmic forecast suggest the stock will increase in the next 3-7 days, but is no longer the optimal long-term investment.

Company Information

Gilead Sciences, Inc. (NASDAQ: GILD) is a biopharmaceutical company that researches, develops and commercializes medicinal products. Focus areas include HIV/AIDS, liver diseases (hepatitis B and C) and cardiovascular/metabolic and respiratory conditions. The company is globally present with operations in North America, Europe, and Asia Pacific. The two major focus areas are antiviral and cardiovascular products, with their flagship products Sovaldi and newly approved Harvoni currently raking in the cash.

The company's product line has seen a strong third quarter. Product sales in Q3 2014 were $5.97 Billion, up from $2.71 Billion in Q3 2013. The quick increase saw non-GAAP diluted EPS grow from $0.52 to $1.84. However, much of the growth was due to the new drug Sovaldi, which used with other antiviral medicine is able to treat chronic hepatitis C genotype 1, 2, 3, and 4 infections in adults. The drug was very well received, and its substantial mark up, with each 12 week treatment costing $83,000, is currently monopolizing the market. To explain, Sovaldi accounted for almost 50% of revenues in Q3 2014; moreover, revenue sales of the drug ($2.8 Billion) were higher than the overall sales of all the company's products in Q3 2013. Using the recent quarter data, we can estimate the growth of the stock price, which can be attributed to Sovaldi and the rest of Gilead Sciences' sectors.

Figure 1: Portion of growth influenced by the Sovaldi drug between Sept. 30th 2013-2014.

Sources: Data - Q3 Financial Report Chart | - Google Finance

The table above is indicative of the large influence Sovaldi had on stock growth. The difference in revenues between the two reports was $3.24 Billion. Of that growth, only 0.86% is attributable to cardiovascular products. In the antiviral segment, Sovaldi is responsible for 86% of the growth while the rest combined account for only 13.14%. This suggests that a decrease in consumer expectations for the drug, change in government regulation, unprecedented side effects, or competitive alternative entering the market will cause a massive blow to Gilead Sciences' stock price. Irrelevant of whether the stock is currently a buy or sell, the stock is risky and could jump either way.

Sovaldi was a game changer because it cured 90% of patients and eliminated the use of peginterferon for many. However, even more impressive is Gilead's second-generation hepatitis C drug, Harvoni, which cures up to 99% of patients and does away with both peginterferon and ribavirin.

Competitors don't intend to let Sovaldi enjoy solitariness.

  1. Merck & Co Inc. (NYSE:MRK) is currently in development of the MK-5172 and MK-8742, which reportedly attained an SVR of 98% with the combo back in April. The company expects to be a strong competitor, and is rumored to price its products significantly lower than Sovaldi.
  1. Perhaps the most talked about, AbbVie's (NYSE:ABBV) VIEKIRAX/EXVIERA pill combo has just got a green light from the European Medicines Agency (NYSEMKT:EMA), which generally approves medicines about three months after such a recommendation, putting AbbVie on track for an early 2015 launch in Europe. The drug is expected to get US approval in the upcoming days.
  1. Bristol-Myers Squibb's (NYSE:BMY) Daclatasvir is also not far behind. Currently in stage 3 trials, the drug is the first NS5A replication complex inhibitor to be investigated in hepatitis C clinical trials. Its final results are due March. Until then, it is hard to say what kind of impact it would have on the market.
  1. Achillion Pharmaceuticals (NASDAQ:ACHN) is currently in phase 2 testing of ACH-3102, a drug which in combination with Sovaldi could potentially shorten treatment time to 8 weeks. So far, testing has shown very positive results with 100% of patients being cured within that time. Harvoni can be used as an 8-week treatment, however unlike ACH-3102 requires that patients have viral loads of hepatitis C below 6 million IU/mL, ACH-3102 does not. The company is currently testing a 6-week treatment, and if successful, the Sovaldi/ACH-3102 treatment will cut into Gilead's market share.

Both analysts and doctors currently agree Harvoni is a game changer. The drug has shown high efficiency with minimal side effects. However, any bites into Gilead's market share can have a significant impact on the stock's price. Currently though, this is the least of their worries. Whether competitors will make alternative hepatitis C cures is no longer a debate, what competitors will price them is the real threat. Harvoni's price tag poses a serious risk to investors, as competitors can easily price their products far below that. Inferior products, with a large enough discount, could force Gilead to lower its price, which will significantly hurt their revenues. Recent developments indicate that the price faces farther risks of being lowered, this time not through competitors, but customers. The Southeastern Pennsylvania Transportation Authority (SEPTA) filed a suit in the U.S. District Court for the Eastern District of Pennsylvania against Gilead Sciences. The argument suggests the company is using its monopolistic situation to gauge prices far above the reasonable amount. The plaintiff(s) seek monetary damages after paying over $2.4 Million to finance employees who received Sovaldi under their health plans. Another example is how earlier this year; the "company established a 23% discount to U.S. government health and agreed to give even more substantial discounts to the VA and Department of Defense after facing intense criticism from the medical community and government representatives."

Algorithmic Analysis

I Know First is a financial services firm that utilizes an advanced self-learning algorithm to analyze, model and predict the stock market. The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions.

I Know First's initial GILD publication "Gilead Sciences: Despite This Year's Triumphs, Watch Out For Weaknesses - An Algorithmic Perspective" forecast a bearish outlook for the stock in the three months following August 26th, 2014. In accordance with the algorithm, the stock dropped by 5.65%. On the 28th of November, two days after the forecast's expiration, we published an update "Gilead Sciences: Is Gilead Taking The Lead? - A Bullish Fundamental & Algorithmic Perspective" which recommended a strong buy for GILD. The stock has since gone up 6% as it was predicted it would in the article. Because pharmaceutical companies rely heavily on testing results, it is more crucial than by any other stock to receive daily updates on the stock you are invested in (as they can turn from strong buy to strong sell overnight); however, longer-term predictions for pharmaceutical stocks are also possible. Investors who followed the algorithmic signals for GILD in a one-year prediction would have enjoyed much higher returns, as GILD was already a strong bullish signal last year. An example is the Dec. 13th 2013 system review "Quantitative Analyses Based On Algorithms: Up To 69.72% Gain In 1 Year." The review table on the right side calculated the return of the stock to be 35% for the time period. The way algorithmic traders know it's a buy signal is through the indicators on the left table, in this case a signal strength of 45.65 and predictability of 0.31 suggests GILD to be a strong long-term investment. These indicators are explained below.

Algorithmic Analysis: Explanation

Figure 3: Example of an I Know First Algorithmic Heat Map.

In this particular Top 10 Stocks Forecast, Apple (NASDAQ:AAPL) had the strongest one-month signal but did not have the strongest predictability. As the asset is in a deeper green color box, this indicates that the algorithm is very bullish about the asset.

Signal

This indicator represents the predicted movement direction/trend; not a percentage or specific target price. The signal strength indicates how much the current price deviates from what the system considers an equilibrium or "fair" price. The signal strength is the absolute value of the current prediction of the system. The signal can have a positive (predicted increase), or negative (predicted decline) sign. The heat map is arranged according to the signal strength with strongest up signals at the top while down signals are at the bottom. The table colors are indicative of the signal. Green corresponds to the positive signal and red indicates a negative signal. A deeper color means a stronger signal and a lighter color equals a weaker signal.

Analogy with a spring: The signal strength is how much the spring is stretched. The higher is the tension the more it'll move when the spring is released.

Predictability

This measures the importance of the signal. The predictability is the historical correlation between the prediction and the actual market movement for that particular asset, which is recalculated daily. Theoretically, the predictability ranges from minus one to plus one. The higher this number is the more predictable the particular asset is. If you compare predictability for different time ranges, you'll find that the longer-time ranges have higher predictability. This means that longer-range signals are more important and tend to be more accurate.

Algorithmic Analysis: GILD Stock Forecast

Upcoming days are critical in deciding the equilibrium price Gilead Sciences' stock will eventually reach. Sovaldi's hot run has been the topic of the industry for a while, and we have been recommending investing in it for a long time. Our recommendation in the short run and long run are now divergent. I Know First's algorithm suggests there is no immediate threat as the 3-day and 7-day forecasts are still bullish on GILD; however, the 14 days and onwards returns a bearish signal, which is strengthening (becoming more negative) over time.

Figure 4: December 11th, 2014, short-term forecast for Gilead Sciences.

In accordance with a fundamental analysis that Gilead Sciences' Sovaldi/Harvoni is about to face fierce competition and an algorithmic analysis indicating the stock is losing its momentum, investors should keep a close eye on the stock in the next seven days, and preferably exit their positions to invest in better opportunities.

I Know First Research is the analytic branch of I Know First, a financial startup company that specializes in quantitatively predicting the stock market. This article was written by Daniel Hai, one of our interns. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article.

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.