Is Gilead Sciences, Inc. (GILD) Looking Cheap?


After announcing its fourth quarter financial results on January 27, Gilead Sciences, Inc. (NASDAQ:GILD) stock has been dropping. In the eight trading sessions since, the stock has lost 8.9% from a January 27 high of $107.02. Why was this negative approach? Is the stock really falling or is it the right time to buy?

Sell Off Reasons

The sell-off in Gilead Sciences, Inc. (NASDAQ:GILD) happened after several questions were raised on the issue of patients’ ability to access the company’s HCV franchise Sovaldi or Harvoni. Aside from this, questions were raised during a conference call on the discounts offered for these two products and the system capacity.

Another reason for the sell-off of Gilead Sciences, Inc. (NASDAQ:GILD) stock was the conservative guidance provided by the company. Gilead offered a revenue outlook of $26 – $27 billion for the year beginning January, 2015. This was lower than the Street analysts’ estimation of $28.19 billion.

There was also a fear that competition might eat into the profits of the company and that it might be forced to offer discounts to the healthcare services provider. Management provided answers to these though it might not have convinced analysts’ and investors during the last earnings conference call.

Guidance Factor

However, these factors can not be taken as is since there could be other opportunities to fill the gaps. Also, the conservatism at the beginning of the year would later turn into more confidence that could allow any company to revisit their outlook for the remainder of the period.

For instance, Gilead Sciences offered revenue forecast of $11.3 – $11.5 billion for the year 2014 during the 2013-fourth quarter conference call. The company reiterated it on April 22, 2014. However, after the first half of 2014 was over, the pharmaceutical firm boosted its sales outlook on July 23 to $21 – $23 billion. This was further updated with the lower end lift to $22 – $23 billion on October 28. However, the company delivered revenue of $24.5 billion.

Therefore, it is clear that the company is conservative when providing guidance. Depending upon the market conditions, Gilead takes a call during the middle of the year to boost its forecast. Given the market size and the lack of players in the HCV market, the company is expected to continue to benefit from the Sovaldi or Harvoni.

There was also the opinion that the company has enough room to extend its worldwide sales. For instance, of the $7.2 billion fourth quarter revenue, only $1.4 billion of that revenue came from Europe and another $300 million from other nations (excluding the United States and Europe). The company might also be achieving approval for its HCV in Japan, which might add sales.

Margins

Gilead provided an adjusted gross margin of 87 – 90% for the year 2015, which is quite commendable. The mid-point comes at 88.5%, which is higher than the 87.9% delivered in 2014 and 74.9% in 2013. The company does not expect any erosion in the gross margin even if it means offering discounts.

Similarly, the company achieved adjusted operating margins of 66.6% in 2014, which was a sharp increase over the 44.5% recorded in the preceding year. S&P Capital IQ analysts expects Gilead to achieve an operating margin of 68.3% indicating a 1.7 percentage point improvement in the current year.

Any doubt about the weakness of Harvoni or Sovaldi sales in the United States would likely be compensated by Japan, where the products are expected to gain approval during the middle of the current year. The launch in Japan would also boost its sales.

Analysts Rating

Following the announcement of the December quarter results, at least four analysts’ have announced their rating. Credit Suisse was the only brokerage to downgrade the shares of Gilead Sciences to a rating of Neutral from Buy. The brokerage, however, has a price target of $115 on the company’s shares.

On the other hand, Citigroup Inc (NYSE:C) has not only maintained a rating of Buy but also kept a price target of $120. Similarly, UBS has maintained a Buy rating with the same price objective.

One more brokerage, S&P Capital IQ analyst, Jeffrey Loo, has reiterated its rating of a Strong Buy on the shares of Gilead Sciences. He has also kept an optimistic one-year price target of $143. He also said that the company’s sales outlook for the current year was nothing but conservative. He indicated that the share buyback program of $15 billion was a positive for shareholders.

Dominant Position

The important observation, made by the S&P Capital IQ analyst, was that Gilead would be able to wither the competition ]and maintain its dominant position in the market. Analyst Jeffrey Loo said that, though AbbVie Inc (NYSE:ABBV) might be able to get a 20% market share, Gilead’s Harvoni was the preferred choice among physicians for simplified compliance. This is because Viekira, from the staple of AbbVie needs 4 – 6 pills more for dosing.

Analysts also think that the clinical data of Harvoni is superior to Viekira, which needs to be taken along with Ribavirrin. Additionally, more patients would become eligible for Harvoni treatment which would remove any price advantage that Viekira holds.

Shares Looks Attractive

S&P Capital IQ analysts said that Gilead shares were trading at 11.1X its 2015 EPS of $9.56 and were well below the historical levels and peers. Therefore, the analysts believe that shares are attractively priced.

Conclusion

It was quite clear that analysts maintain a price target of above $115 on the shares of Gilead Sciences, Inc. (NASDAQ:GILD). This suggests that there is a potential for an 18% upswing and that the stock is currently cheap and could be worth buying at current levels.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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