Gilead Sciences: Still A Core Holding (NASDAQ:GILD)

In the midst of the Coronavirus crisis, Gilead Sciences (GILD) reported first-quarter results. While investors have a healthy interest in the ordinary course of business, they are also curious about Gilead’s scientific attempts to contribute in solving the current health crisis.

Ironically, Gilead might have the best odds of making a potential breakthrough with its drug Remdesivir, yet investors have only seen a relatively modest bump in the share price. Meanwhile, many micro caps have seen spectacular percentage returns, although their lower market capitalization makes such moves less significant in dollar terms, of course.

The Numbers

On the final day of April, Gilead reported quite strong first-quarter results, with product revenues up more than 5% to nearly $5.5 billion, as Gilead has been facing revenue declines for a long time. That headline number is a bit too optimistic as the $267 million increase in product revenues is majority driven by increasing buying patterns, as consumer were concerned about availability during the crisis. This hoarding effect added an estimated $200 million in revenues.

After Gilead became almost a pure play on Hepatitis C sales a few years ago following its breakthrough, the same can almost be said for the HIV franchise, where revenues rose from $3.6 billion to $4.1 billion, equivalent to three quarters of total sales. HCV sales fell from $790 million to $729 million as “other” revenues, a group of 7 drugs, reported $464 million in sales vs. a $696 million number this quarter last year due to some patent exclusivity periods ending.

The only real growth engine outside of HIV is Yescarta which generated $140 million in sales, up from $96 million in the first quarter of last year. Revenues rose by $18 million on a sequential basis, marking quite an acceleration vs. the $4 million sequential increase between the third and fourth quarter of 2019.

Reported earnings on a GAAP basis fell from $1.98 billion to $1.55 billion, but that is due to the decline in the value in the stake of Galapagos. Following a percent decline in the outstanding share base, earnings fell from $1.54 per share to $1.22 per share. Excluding the reduced value of the stake in Galapagos and some other items, adjusted earnings improved a penny to $1.68 per share.

The company ended the first quarter with $24.3 billion which is pretty much equal to the debt load, for a flattish net cash position. That is quite an achievement as the company pays out quite a healthy dividend of an annualised $2.72 per share, while it spent multi-billions on the acquisition of Kite and parts of Galapagos as well.

Recent Trends

Quite frankly, the issue of Gilead is that following the major success in HCV, the company has only managed to grow in HIV and is creating perhaps a somewhat similar dependency position. The company has continued to pour much money into R&D as well as invested billions in acquisitions of Kite and Galapagos, but results are quite modest. By now only Kite has started to contribute in actual revenues with Yescarta, yet the annualised +$500 million numbers adds just about 2-3% to overall sales, far from a game changer.

Nonetheless, investors have two other reasons to turn a bit upbeat. Gilead announced a massive $4.9 billion acquisition of Forty Seven in March at a huge premium. To illustrate the extent of the premium, this company was acquired for nearly $100 per share, a nearly twenty-fold from the lows seen in the year ahead of the deal. Gilead believes that magrolimab, the leading product candidate, has real potential in treatment of several types of cancer. Important to recognize is that the Forty Seven transaction closed just a day after the first quarter, meaning that Gilead now operates with about $5 billion in net debt, still not concerning number by any means of course.

The other part of the enthusiasm from investors stems from the potential to make a contribution to solving the COVID-19 crisis. The company started two phase III studies in February for Remdesivir and preliminary results show shortened recovery times for patients administered with the drug. A day following the release of the results, the FDA approved emergency use authorization of Remdesivir for the treatment of COVID-19.

Optimism on Gilead has led shares to rise from $65 to $80 since the crisis unfolded, a great outperformance vs. the market. Investors are perhaps fearful that Gilead might make a significant contribution to science and health but will not commercialize this solution greatly.

Quite frankly, I like the conservative note as it avoids a great deal of public outlash, as I am sure that if the ramp-up and contribution to resolving the crisis might become apparent, Gilead has a valid public relationship base to start charging.

When I last looked at Gilead at the start of February, when the company reported its 2019 results, I concluded that 2020 would become a flattish year. The first-quarter sales results more or less confirm that picture, as sales are flattish if we adjust for the hoarding effect. Early February, shares traded at $65, and ever since have risen nearly a quarter of their value at a time when the market has seen declines, despite a spectacular rally as of recent. With net debt very modest at the moment, and that still is the case even after the Forty Seven deal, the realistic +$6 per share number made it compelling at just 10 times earnings with sales being stable at the time.

Compared to that time, I noted the great outperformance of the stock as the first-quarter results provide some good news, mostly relating to Remdesivir, and to a smaller extent the accelerating momentum of Yescarta. Following the move higher, I feel no urge to start chasing here, yet I am not happy to start taking profits yet. The 13-14 times largely unleveraged basis, in combination with a potential solution for the COVID-19 crisis, means that I am still not tempted to take profits here.

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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.

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