Gilead Sciences: The Sales Tell The Story

Summary

• Gilead's first quarter is a real bummer.
• The company continued their trend of falling sales, and subsequently smaller earnings.
• With no big catalysts for change in the near future, I am bearish on the stock.

I've been right about Gilead Sciences (NASDAQ:GILD) for three years. The company has suffered from competition, rather than public scrutiny on pricing. The stock performance can be accurately tracked through their product performance. The sales trends through the past quarters have told us everything we need to know. As their once lucrative lineup of Hepatitis C drugs declines in sales, the company has not been able to counter the sales declines with a substitute. Sure, they have HIV gains, and the huge purchase in oncology could be quite fruitful. But right now there are declines in net income that can't be overlooked. The market reaction to Gilead's first quarter results demonstrate that.

A 59% fallout in Hep C drug sales does not a good quarter make. HCV drug sales are down to $1.04 billion in Q1. That's a stark contrast to Q1 2017's $2.57 billion. The company cited the fallout to be primarily linked to both Harvoni and Sovaldi, the company's biggest Hep C products. Though the release also admitted the fallout in Epclusa due to growing competition in the United States. I predicted the effects of this competition last year when competitors began to ramp up their own Hep C. treatments.

The market has become so overwhelmed with players, and subsequent pricing wars, that Merck (MRK) gave up further development in the field last fall. They are selling their current drug, Zepatier, and not planning on putting any further investment into new treatments. Johnson & Johnson (JNJ) has also ceased investment.

It's sort of the catch 22 of curing a disease. You create a finite customer base for yourself. It worked well for Gilead when they were the only big honcho. But now there are multiple players in a rapidly declining market space. Abbvie's (ABBV) drug "Mavyret" has proven to be superior in terms of cure times and efficiency among different groups. That's bad news for Gilead, and it shows in their current performance.

These sales declines have really damaged the company's finances. Revenues pulled back almost 22% year over year to $5.08 billion. The company's costs are still rising, squeezing operating income. Income from operations fell nearly 43% to $2.15 billion. After tax provisions, all these declines resulted in net income of $1.53 billion versus $2.7 billion a year ago. All of this means a 42.9% fallout in earnings per diluted share to $1.17 vs. $2.05.

The stock and the future

Gilead's stock is down around 7% on the news. There a mixed bag of different viewpoints that can be taken on Gilead Science's situation. On the one hand, the company has a ton of cash on hand, and investments in what could be a huge oncology market. With over $30 billion on hand, the company can easily continue on its current course for a long time.

On the other hand, Gilead is usually propped up by growing HIV sales that counteract the falling HCV franchise (though it should be noted these HIV sales have never been enough to completely stem the declines). However, this quarter was not as balanced. HIV sales growth was relatively stagnant; though many feel that area of the business will pick up. Their maneuvers in oncology are compelling, but face the risk of being outdeveloped by newer advances in the cutting edge field. There are a lot of different players working on cellular therapies for cancer. I am highly doubtful that Gilead will be able to create the same dominance that it held in the HCV field.

My feelings on the stock remain bearish for the time being. Where is the catalyst for stock price appreciation? It's certainly not in the near future. The time horizon for big profits from oncology is far off. The only thing that could spar a big jump in the future seems to be another acquisition. The company has the money, and certainly seems to have a knack for finding the "next big thing" in the past. But I'll remain iffy on the stock until I see some really meaningful changes. I've been right about this thing quarter after quarter. I just don't see the momentum right now.

Analyst’s 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.