Gilead Sciences: The Future Is Complicated

| About: Gilead Sciences, (GILD)


Gilead Sciences mix of slumping sales, future product speculation, and cash position make for a confusing investment.

Sales of its Hepatitis lineup are consistently falling, while HIV sales growth fails to make up the difference.

On the other hand, the company managed to put over $30 billion in the bank through past sales, so it's well covered.

With a lot of developing competition to its expensive investment in immunotherapy oncology, I view Gilead as a hard hold. There path forward seems complicated.

It's no secret that Gilead Sciences (GILD) has enough cash to continue on regardless of earnings for quite some time. Regardless, the stock price has proved to be linked to actual earnings. Lately we've seen some enthusiasm over the potential of its Kite Pharma purchase, but that payoff is a long way off.

While the potential of immunotherapy within oncology is staggering, there are other competitors in the game. This will not be a Hepatitis C event where Gilead basically controlled the initial market. I have no doubt that Gilead's future will be far more complicated than its past.

What this really boils down to is how long you're willing to wait, and how much turbulence in earnings you're willing to deal with. The company sighted growth in HIV antiviral sales in its latest earnings report. While that's great news, it should be noted by all that the fallout in HCV drugs continues to outpace any sales revenue from things like HIV. Because of this, I contend that you'll likely see lower and lower revenue before you see things rise higher. The question every investor should ask themselves is how much are you willing to deal with while waiting?

A very different revenue stream

The fallout in Hepatitis C drug sales has damaged their income. This hasn't damaged the stock, as optimism still rests on the growing success of their HIV treatments, along with the potential of their M&A entry into the immunotherapy business for cancer. While the optimism and potential are surely justified, they don't change the fact that Gilead reported some pretty cruddy financials last quarter.

Revenues from product sales for the fourth quarter of 2017 fell a whopping 19.1% to $5.837 billion. And no, the company did not manage expenses to match the lower sales. The cost of goods sold increased by 16.8% to $1.256 billion. The quarter had a loss of $3.836 billion, but I wouldn't get too crazy about that as the company set aside over $5 billion for income taxes. Minus taxes, Gilead's income fell $2.126 billion. That's a 43.46% decline year over year. Once the company's provisions for income taxes are factored in, Gilead had a net income loss of $3.87 billion. That's a stark reversal to last years $3.01 billion gain. All this means a $2.96 loss per diluted share.

While these areas have great promise, I am still skeptical of any real catalyst for the stock price in 2018. It has a demonstrated tendency to not venture too far from its actual earnings results, and HIV sales are still not covering the spread created by declining HCV drug sales. The benefits of immunotherapy income from oncology patients are still far off, so where's the upside for the year?

You can throw FDA approval of Biktarvy at me, but let's face it. This drug (which I'm sure will be great for HIV patients) will more likely replace Gilead's older antiviral treatments. While it will likely help sales, I'm skeptical that it will represent anything as meaningful as Harvoni.

I contend that Gilead is nothing more than a hold at this time. If you're interested in the long game, there's a good chance that GILD presents lower entry points this year. If you're interested in the dividend, there are a lot of 2.5% dividends out there. Beyond any of that, there is a good chance that Gilead faces staunch competition in this new field of CAR-T therapy for cancer. Novartis (NVS) already has their own version of the same drug that Gilead just dropped nearly $12 billion on.

This cell therapy approach to fighting is groundbreaking stuff. As such, it is still in its infancy. There are likely multiple approaches to the treatments, as smaller players like Cellectis (CLLS) is demonstrating. The smaller player is developing its own treatment that involves donor cells, and could lower the overall pricing of the treatment. Crispr Therapeutics (CRSP) is also doing the same thing. Pricing is big here, back in October Gilead stated its list price for Yescarta (the new name for their acquired drug) at $375,000. If smaller rivals can undercut them, with superior products, Gilead's acquisition becomes a lot less valuable.

According to my understanding, Cellectis is using healthier donor immune cells, rather than the patients' own cells, to create what basically amount to immune system T cells on steroids. As with the treatments coming from Gilead or Novarts, these pumped up T cells attack the cancer like an athlete on performance enhancers, drastically increasing results. So why is this version such a threat to Gilead's next big revenue stream?

Cellectis' version means they can make hundreds of doses from going through the process one time. Because they would no longer need to individually remove and alter cells on a patient to patient basis, costs would be greatly reduced. Crispr Therapeutics Chief Executive is estimating the cost of treatment at $5,000 or less. Yep, that's right.

Known as Allogeneic CAR-T therapy (doctors love to rub it in that they're smarter than me by using big words), the clinical results are still ongoing, but this could be really huge if it works to the degree they're pushing for. There still seems to be some work to be done regarding working the genetics to allow for donor cells to be widely received by patients, but that's way above my pay grade. Relating to Gilead, this is a huge threat to the speculated revenue potential of Yescarta down the road.

All in all, my essential thesis is that Gilead's future is not simple. They're going to have to circumnavigate a great deal of competition within oncology. With over $30 billion in cash, they have plenty of war money, but I worry that the road forward could get expensive. With a progressively (and very consistently) falling revenue stream from HCV related activities, the stock is hurting for near term catalysts.

HIV sales are helping, but they're only replacing HCV, not driving total revenues higher. At some point, the HCV revenue streams may become so low that other antiviral sales figures do in fact start increasing the bottom line higher than the HCV sales fallout, but that time will likely mean that revenues have dipped lower than they are now, a troubling thought for Gilead's earnings per share.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.