Gilead Sciences, Inc.

-0.36 (-0.52%)
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Gilead Earnings Preview and The Moment of Truth



On June 12th, 2015, I authored an article, Why Gilead May be the Strongest Company in the World. That was quite a statement, but the facts behind it may have been even bolder. I'll reprise some of those visualizations in the story below, but also focus on what has become a very difficult landscape for Gilead leading up not just to earnings on July 28th, but for the next several years.

I remind all readers that a report just like this one is available for any company for free on, literally for free. No e-mail. No login. Free. Forever. Period.

GILD has 12 products in Phase II trials and 7 products in the Phase III trials. It is the only mega cap in the world growing revenue by more than 200% year-over-year that is also hitting new all-time highs in earnings, free cash flow, operating margins and revenue per employee.

GILD is the largest of the mega four biotechs (BIIB, CELG, AMGN). The company has grown revenue and earnings faster than any large cap pharma or biotech by huge amounts, earns more revenue per employee than its peers by more than 200%, spends less on R&D per dollar of revenue by as much as 85% as its biotech peers yet at the same time has one of the richest pipelines in all of biotechnology and more cash on hand to buy new promising products than any other peer by two- to ten-fold.

The firm's operating margins are exploding and its growing like a micro cap but at the size of a mega cap.From a fundamentals perspective, the firm is literally perfect. In fact, just to give you an idea of how remarkable this firm is, let's take all biotech and pharma companies with market caps above $15 billion (there are 25 such companies), equal space them on the x-axis (rank them) and plot revenue per employee (in $millions) on the y-axis.

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Incredibly, GILD drives over $3.5 million in revenue per employee. The next largest is Biogen (BIIB) at $1.285 million. Hello?

But, the question as always for companies growing this quickly is, "can it be sustained?" Or even further, "what comes after perfect?"

Gilead's revenue and earnings have exploded due to the biggest new drug success in the history of biotechnology (Hepatitis C drug Sovaldi) which hit sales of over $10.2 billion in 2014. The next two largest revenue driving products for GILD last year were HIV treatments Atripla ($3.5 billion) and Truvada ($3.3 billion). In the pipeline image below, we have plotted the number of Phase III trials on the y-axis and the number of Phase II trials on the x-axis for large cap biotechs. Note that GILD has the second most products in either Phase III or Phase II.

Click Here to See More Phase Data For Any Biotech or Pharma

Earnings Estimates

Revenue estimates range between [$7.2B, $8.38B], with the average coming in at $7.61 billion. That's a remarkably wide range and is indicative of the rather large uncertainty surrounding Sovaldi.

Earnings per share estimates range between [$2.35, $3.2], with the average coming in at $2.70. Again, that is an insanely wide range for a company this big. Risk. Is. Here.

The bullish argument
The bullish argument surrounding Gilead rests at the feet of an expected beat in revenue of the HCV franchise (Harvoni and Sovaldi). The street is calling for a decline in revenue from $3.4 billion last quarter to $3.2 billion this quarter. There is a strong clamoring that in fact the numbers will rise well above estimates and may near the $4.7 billion range per an article in Barron's.

The bearish argument
Growth is slowing due to price pushback from insurance companies for the flagship hepatitis C drugs Harvoni and Sovaldi. Further, The Motley Fool reported that AbbVie's competing combination drug, Viekira Pak, is starting to capture larger market share. To quote the article, "Put simply, we may have already seen the high-water mark for Gilead's hep C franchise."

There's more risk, though. Gilead owns about 85% of the market for HIV drugs but the critical patents to these drugs are expiring in the period 2018 to 2022. When patents expire, those same drugs become available under generic labels and the generic prices are substantially lower alternatives for patients. Turning to the Hepatitis C market, where GILD owns 90% of the market share, a number of companies have drugs in development that have faster treatment cycles than Sovaldi. If those new drugs come to fruition, that would be a devastating blow to Gilead's monstrous position as the dominant player.

So what next?
Well, let's not forget that Gilead has tens of billions of dollars in the bank and growth through acquisition is a favorite for this firm, particularly with smaller companies that have drugs in development.

Technicals   |   Support: 108.74   |   Resistance: 118.85   

Golden Cross Alert:
The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

GILD has a two bull (low rated) technical rating because it's trading below both its 10-day (short-term) and its 50-day (medium-term) moving averages. We do note that the stock is trading above the long-term 200-day moving average.

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 27,485 13,669 9,952

Operating Margin (QTR) 3.418 2.56 1.69 RISING

Net Income (TTM US$ Millions) 14,207 4,580 2,872

Levered Free Cash Flow (TTM US$ Millions) 14,553 3,319 2,708

Research and Development (US$ Millions) 693 592 492 RISING

Research and Development Expense/Revenue 0.091 0.118 0.194 FALLING

Stock Returns and Chart

GILD is up +6.7% over the last three months and up +4.8% over the last six months. The stock price is up +23.2% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 27,48513,6699,952

Revenue (TTM) is trending higher and has in fact broken all-time highs for 22 consecutive quarters. Sovaldi had zero dollars of revenue two-years ago, and now stands at over $10 billion. So, yeah, that happened...

GILD is not only growing revenue to all-time highs consecutively, but it just realized 101% year-over-year growth. While massive revenue growth often times comes at the expense of earnings, free cash flow and operating margins, that is not at all the case for GILD, as all of these measures are exploding higher and are totally unprecedented versus peers and are really unprecedented ever. This is the fantastic beauty of biotech. What do all these numbers mean?
GILD's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Operating Revenues/Operating Expense 3.4182.561.69RISING

Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter GILD showed a ratio of 3.418 which is totally absurd. How absurd? Let's plot that same population of 25 bio/pharmas over $15 billion in market cap, but this time we equal space the x-axis (rank) and put operating revenue / operating expense on the y-axis.

Click Here to See More Phase Data For Any Biotech or Pharma

Gilead's 3.4 compares tot he next highest company Biogen (BIIB) at 1.8. Amgen (AMGN) comes in at 1.72. The last two numbers are incredibly high. it's GILD's number that is just berserk.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 2.56. In the last year we can see operating margins are increasing and are also currently greater than 1.0 (the critical level).

GILD's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was positive (raises the rating).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.

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Net Income (TTM US$ Millions) 14,2074,5802,872

Net Income (after tax profit) over the trailing twelve months (TTM) for GILD rose 210% year-over-year. The company has hit all-time highs in earnings (TTM) for six consecutive quarters and most recently reported $14.2 billion in net income, up from $2.9 billion two-years ago.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the rising bars from a year ago (four quarters ago).

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Levered Free Cash Flow (TTM US$ Millions) 14,5533,3192,708

Levered Free Cash Flow (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For GILD the metric is up 340% rise year-over-year. Levered Free Cash Flow (TTM US$ Millions) is trending higher meaning that it has increased for at least five consecutive quarters (the annual number). This is an unusual occurrence and has a very positive impact on the fundamental rating for GILD.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time and the green bar which represents an all-time high.

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Research and Development (US$ Millions) 693592492RISING

Research and Development (US$ Millions) in the most recent quarter for GILD was $693 million which is up 17% year-over-year and up 41% from two-years ago. This is critically important for Gilead, like any biotech, as the pipeline is the lifeline. Given the ending patents and potentially newly found competitors in the Hep C space, GILD better be pumping out new products and be on the look out for acquisitions.

R&D per dollar of revenue for the latest quarter is $0.091. Last year this measure was $0.118 (it's falling).

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per dollar of revenue in the orange line. Note the rising bars from one-year ago.

Click Here to Interact With This Chart

Gilead has the largest earnings, revenue, free cash flow and operating margins of any biotech on planet Earth. It’s also growing faster than any large cap biotech in all of those measures and generates more revenue per employee than any biotech or pharma in the world. As of right now, it is living in the rarefied air of absolute perfection. Here’s the thing, though. Where does a firm go from perfection?

The risks lie in the price of Sovaldi and the copies of it that are now rampant in third world countries (which is legal believe it or not) as well as new treatments in development that may have a faster treatment time. The great success of Sovaldi is now the great risk. The company also faces the risk of ending patents which will hurt its worldwide dominance in the HIV market. But, rest assured, GILD has a GIGANTIC pipeline of new drugs and all the money in the world to buy the next great and promising drugs in early stages without affecting operations negatively if the purchases are a bust.

There simpy is no better positioned company in all of North America in any sector right now, than Gilead. But, it must continue to execute perfectly and that is a big risk.