As an investor in Gilead Sciences (NASDAQ:GILD), I was disappointed, like thousands of others, by the fact that the company missed expectations in its first quarter. After all, Gilead had had an impressive record of significantly beating estimates in its previous five quarters. However, in my opinion, the company can still achieve a significant growth due to its rich pipeline with over 25 different programs under development, and by a large acquisition.
Yesterday, on April 28, Gilead Sciences reported first quarter 2016 financial results, which missed EPS expectations by $0.12 (3.8%). First-quarter revenue rose 2.6% to $7.794 billion from a year earlier, also missing the average analyst prediction of $8.135 billion. Gilead has shown significant earnings per share surprise in eight of its last ten quarters, as shown in the table below.
Data: Yahoo Finance
Source: First Quarter 2016 Earnings Slides
Nevertheless, Gilead made no change to its full-year guidance for $30 billion to $31 billion in product sales and 88% to 90% gross margin.
Source: 2016 Guidance
Gilead's blockbuster hepatitis C drugs Harvoni and Sovaldi accounted for most of the decrease in first quarter sales. Harvoni missed badly in the U.S. but outperformed abroad, while Sovaldi sales increased in the U.S. Also on April 28, AbbVie (NYSE:ABBV) reported that its Harvoni's competitor Viekira also came up short of consensus, which the company attributed to Merck's (NYSE:MRK) unexpectedly aggressive pricing of recently launched rival Zepatier. Merck is scheduled to report its first-quarter fiscal 2016 financial results on Thursday, May 05, before market open, which will clarify the real influence of its new hepatitis C drug on Harvoni sales in the U.S.
Hepatitis C Treatment Product Sales
Harvoni and Sovaldi sales accounted for 55.9% of product total sales in the first quarter of 2016, for 59.5% in 2015, and 50.7% of total product sales in 2014. HCV products sales were $4,294 million in the first quarter of 2016 a 12.2% decrease from the previous quarter, and 5.6% decline year-over-year. Gilead's HCV drugs sales in the last nine quarters are shown in the chart below.
Source: company's reports
HCV products sales in the U.S. were $2,052 million in the first quarter of 2016 a 13.3% decrease from the previous quarter, and 40.3% decline year-over-year. Harvoni and Sovaldi sales in the U.S. have dropped due to the increase in discounts required to open up access to patients with lower fibrosis scores and a modest shift in payer mix toward more deeply discounted government payer segments. In addition, revenue was further impacted by higher-than-expected prior-quarter rebate claims. Rebate claims come in one to two quarters in arrears and were updated in Q1 to reflect the higher claims received. Gilead's HCV drugs sales in the U.S. in the last nine quarters are shown in the chart below.
Source: company's reports
HCV product sales in Europe were $835 million in the first quarter of 2016, a 1.3% decrease from the previous quarter, and 13% decline year-over-year. According to the company, while overall Gilead patient starts with increased 5% sequentially to around 31,000 in the quarter. Average revenue per patient decreased due to a shift in geographic mix and shorter average treatment duration. The company also saw a negative foreign exchange movement, which affected HCV revenues by about 8% year on year and 3% sequentially. Gilead's HCV drugs sales in Europe in the last nine quarters are shown in the chart below.
Source: company's reports
HCV product sales in Japan and other international were $1,407 million in the first quarter of 2016, a 16.2% decrease from the previous quarter, and 814% increase year-over-year. Japan accounted for 77.4% of the total HCV products international sales. In Japan, Sovaldi volumes declined from high early launch levels, similar to other markets. Channel inventory pricing for Sovaldi and Harvoni was adjusted during March for the mandatory price reduction effected as of April 1. Gilead's HCV drugs international sales in the last nine quarters are shown in the chart below.
Source: company's reports
Balance Sheet, Dividend and Shares Repurchase
Also yesterday, Gilead announced that the company's Board of Directors declared a cash dividend of $0.47 per share of common stock for the second quarter of 2016, a 10% increase over its previous dividend. The dividend is payable on June 29, 2016, to stockholders of record at the close of business on June 16, 2016. Gilead started to pay a dividend in the second quarter of 2015. The forward annual dividend yield is at 2.09%, and the payout ratio is only 10.4%. 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 March 31, 2016, Gilead had $21.3 billion of cash, cash equivalents and marketable securities compared to $26.2 billion as of December 31, 2015. During the first quarter of 2016, the company utilized $8.0 billion on stock repurchases and made an upfront license fee payment of $300 million and an equity investment of $425 million related to its license and collaboration agreement with Galapagos N.V. (OTC:GLPGF). Cash flow from operating activities was $3.9 billion for the quarter.
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, 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. On the conference call, CFO Robin Washington explained that the company will continue to make acquisitions when the right opportunities present themselves. According to Mr. Washington, the company has purposely focused on share repurchases, because in the absence of M&A, it allows the company to be flexible and more opportunistic. However, when the right M&A opportunity presents itself, it allows the company to reduce its share repurchases to make those necessary acquisitions and leverage its cash and debt and borrowing if it needs to. Also on the call, CEO John Milligan, clarified that while the company prefers friendly acquisitions, it is not unwilling to go hostile.
Gilead has a rich pipeline, creating opportunities that may allow the transformation of the treatment of many diseases, like NASH, HPV, inflammatory diseases, certain cancers, and cardiovascular conditions for which few, if any, options exist. To keep up growth, Gilead has struck deals to build up its pipeline of experimental drugs. In December 2015, Gilead said it would pay $725 million to acquire a stake in Galapagos N.V., buying into the Belgian drugmaker's experimental treatment for rheumatoid arthritis. In April, it said it would pay $400 million for a drug from closely held Nimbus Therapeutics LLC to add to its portfolio of treatments for the fatty liver disease known as nonalcoholic steatohepatitis, or NASH.
Gilead delivered first quarter financial results, which missed EPS expectations by $0.12 (3.8%). First-quarter revenue rose 2.6% to $7.794 billion from a year earlier, also missing the average analyst prediction of $8.135 billion. However, in my opinion, the company can still achieve significant growth. Gilead has a rich pipeline, creating opportunities that may allow the transformation of the treatment of many diseases, like NASH, HPV, inflammatory diseases, certain cancers, and cardiovascular conditions for which few, if any, options exist. What's more, Gilead has a very strong balance sheet. As such, the company has the resources to make significant acquisitions to resume growth. Moreover, the company generates strong free cash flow and returns substantial capital to its shareholders by stock buybacks and dividend payments. As I see it, the recent drop in its price creates an opportunity to buy the stock at an attractive 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.