I am an (un)fortunate shareholder of Gilead. Well truth to tell I was expecting business to decline, but guidance for 2017 is quite shocking and -10% reaction looks justified at first sight.
Market was expecting around $10-12b in HCV Product Sales. What does it mean for net earnings? Well $11b (average) - $8b is around $3b sales less. Having 85% margin and 25% tax gives us around $1.9b less on net profit, so around $1.5 EPS less. A lot less. My rough calculation gives me around $8.2 expected EPS17.
With share price of $66 it is P/E17 = 8, not bad, especially if we take some buybacks during a year, 3% dividend yield. The problem is how decline in HCV Product Sales will looks like in 2018 (and obviously if 2017 guidance will be realized).
In fact Non-HCV product sales is expected to be flat. Imagine there is no HCV product sales, then company should generate around 4$ EPS less, so around 4$ (I keep costs fixed). With $4 earned in Non-HCV business we obtain P/E = 16 with upsides coming from:
- HCV is really selling and generating profits
- Costs should be cut when there is no HCV sales and I assume costs to be flat (on the other hand maybe margin would be lower due to lower scale)
- R&D expenses should bring some new products.
Company presents Significant Pipeline Milestones Anticipated in 2017 - 2018 in its' presentation. It is hard for me to appraise its' status and earnings potential, but thinking rationally - spending more than $3b annually on R&D must bring some benefits! Historical track record of management was good, company has more than $30b in cash on accounts, so if it were the best decision for shareholders to accelerate spendings for acquisitions / R&D I think that management would do it so far. I simply trust them and I hope my trust will be rewarded.
Summing up, share price dropped a lot, future is demanding, but I see no reason to sell shares now. Valuation is not high, company is generating strong cash flows and I assume that weak guidance for 2017 is in prices. The problem might be with negative recommendations / consensus going down, but from long term perspective one-two successful info from R&D pipeline / some acquisition and maybe sentiment will change… finally, was GILD's situation better in 2010? No.
Disclosure: I am/we are long GILD.