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One of the cheapest stocks in our all All Investable – Stock Screener is Gilead Sciences, Inc. (NASDAQ:GILD).
Gilead Sciences, Inc. (Gilead) is a research-based biopharmaceutical company. The company focuses on the discovery, development and commercialization of medicines in areas of unmet medical need. Gilead’s principal areas of focus include human immunodeficiency virus (HIV), liver diseases, such as chronic hepatitis C virus infection and chronic hepatitis B virus infection, cardiovascular, hematology/oncology and inflammation/respiratory.
A quick look at Gilead’s share price history over the past twelve months shows that the price has been pummeled, down 21% to $68.83 since February 2016, and trading just 5% off its 52 week low of $65.38. Hard to believe when you consider that the stock was trading in excess of $100 in April 2016.
(Source, Google Finance)
Gilead recently announced its Q4 2016 and FY2016 results. Total revenues for Q4 2016 were down 14% to $7.3 billion, compared to $8.5 billion for the pcp while net income was also down 34% to $3.1 billion compared to $4.7 billion for the pcp. Full year 2016 total revenues were down 7% to $30.4 billion compared to $32.6 billion for FY2015, while FY2016 net income was also down 25% to $13.5 billion compared to $18.1 billion for the pcp.
Following the release of its Q4 2016 and FY2016 earnings the company’s share price dropped 10% in just two days. The reason for the drop was management’s 2017 guidance that product sales are expected to fall from the $29.95 Billion reported for FY2016 to between $22.5 Billion and $24.5 Billion for FY2017. That was enough to send investors scurrying and hence the sell-off.
The ‘problem’ as investors see it is the drop in new product sales for Gilead’s HCV products. As you can see in the diagram below, FY2016 HCV new product sales fell 22% to $14.8 Billion from $19.1 Billion for the pcp.
(Source, Company reports)
In the U.S. total HCV revenue was $2 billion in the fourth quarter, down 15% year over year. Total HCV treatment starts in the U.S. for the full year 2016 were an estimated 231,000, approximately 25,000 less patient starts than in 2015. There were a few one-time events that impacted this number in 2016. Notably, one, the opening of access of two of the largest U.S. commercial payers which happened in quarter one. Two, the increase in the number of patients treated through the VA system, especially in quarter two. And three, the treatment of genotype 2 and genotype 3 warehouse patients following the approval of Epclusa in the second half of 2016.
The company stated in its latest earnings call that it does not anticipate the same or similar factors repeating themselves in 2017 however, Gilead expects that patient starts in 2017 will be lower than in 2016. The decline is expected due to a change in the profile of patients coming into treated care. A greater number of patients have less advanced disease, and thus there is less urgency to begin using curative DAAs like Harvoni and Epclusa. In addition, an increasing percentage of untreated patients face circumstances that favor delay such as ongoing drug or alcohol use, co-morbidities or unstable living conditions.
HCV Q4 revenues fell even further in Europe, down 26% year over year but up 4% from the previous quarter. Despite the year-end pickup, Gilead expects patient starts to continue to decline in 2017. Countries like Germany, France and the UK are fast exhibiting the same characteristics as the U.S. Spain and Italy continued to experience budgetary constraints, and the treatment of F0 to F2 patients in these countries has been limited.
Lastly, Japan HCV product sales for the fourth quarter were even worse, down 77% year over year due to the decline in patient starts and the entry of another company’s product to the market.
To top things off, Gilead will also lose the tenofovir disoproxil fumarate exclusivity in 2017 in some countries outside the U.S. The company has forecast that the patent expiry will mean a $0.4 Billion – $0.6 Billion drop in non-HCV new product sales for FY2017.
So that’s the bad news for Gilead. The good news however is that FY2016 new product sales for the company’s HIV and Other Antiviral products grew 17% to $12.9 Billion compared to $11.0 Billion for the previous corresponding period.
Gilead’s HIV products had one of the company’s strongest years in 2016, led by the rapid adoption of TAF-based regimens. In the U.S., total HIV and other antiviral revenue was $2.4 billion in the fourth quarter, up 20% year over year. Genvoya, Gilead’s first TAF-based single-tablet regimen, surpassed $1 billion in revenue in its first year. No other HIV product has achieved this level of success, and this performance is a testament to the clinical profile of TAF in combination with elvitegravir in one tablet. Genvoya quickly became the most prescribed regimen across all U.S. treated HIV patient groups within nine months of launch.
At the end of 2016, TAF-based regimens made up 37% of Gilead’s HIV prescription volume in the treatment market. This is remarkable considering that Genvoya was launched a little more than a year ago, and Odefsey and Descovy have been on the market for just nine months. Most patients on these products switch from Gilead’s older regimens due to the improved safety profile of TAF. Additionally, an estimated 10% of patient switches are coming from non-Gilead therapies, resulting in incremental growth for the franchise.
The company reported strong uptake of Genvoya continues across launch markets in Europe, including Germany, Spain, and the UK. In Spain, Genvoya is the most prescribed regimen for switch patients and the second most prescribed regimen for treatment-naive patients. In recent weeks Genvoya has also been introduced in France. France is the largest developed HIV market outside the U.S. The company also expects to introduce Genvoya in Italy by early Q2 2017.
With regards Descovy and Odefsey outside the U.S., Gilead now has the products available in 13 and 11 countries respectively with additional launches anticipated in 2017 as pricing and reimbursement discussions continue.
Gilead has also seen a strong uptake for the use of Truvada for pre-exposure prophylaxis, or PrEP. At the end of 2016, approximately 110,000 people in the U.S. were using Truvada for this indication. When used in combination with other prevention strategies, Truvada for PrEP can have a meaningful impact on public health by helping to reduce HIV transmission rates.
The majority of PrEP prescribing to date is concentrated in four cities where awareness is high, most notably San Francisco. The city recently announced a reduction in HIV infection rates as a result of greater testing, the use of anti-retrovirals for treatment, and the adoption of PrEP. There is an opportunity to replicate this success in other areas across the United States, and Gilead is playing a more prominent role in PrEP education via the hiring of a field-based team. Gilead believes that Truvada for PrEP will continue to be an integral part of its growth in HIV in the U.S., as communities embrace the public health benefits of prevention.
Pipeline
The company is also doing well in terms of its current pipeline. Gilead stated in its latest earnings call that there is still one unmet medical need in HCV treatment: patients who fail direct-acting antivirals. Gilead filed a new drug application for its single-table regimen of SOF/VEL/VOX in December and the FDA granted priority review status with a set target review date of August 8, 2017. A market authorization application in the EU was filed in January. If approved, SOF/VEL/VOX would be the first STR for HCV patients who have failed prior treatments.
In addition to SOF/VEL/VOX, Gilead also has a progressed pipeline that includes:
— Bictegravir/F/TAF STR Phase 3 studies enrolled
— Filgotinib Phase 3 studies initiated in RA, UC and Crohn’s disease
— Selonsertib (GS-4997, ASK-i inhibitor) in Phase 3 in NASH
— GS-5745 (MMP9 mAb inhibitor) in Phase 3 for gastric cancer
— Entospletinib (GS-9973, SYK inhibitor) advancing in AML
The most important of which could be the continuing advancement of the company’s NASH programs. NASH stands for ‘nonalcoholic steatohepatitis’, and it’s projected to overtake hepatitis C as the leading cause of liver transplants in the U.S. by 2020. As a result the race is on for drug companies to develop a treatment.
Gilead has reported that NASH is a growing unmet need around the world with data suggesting that approximately 3 million people in the U.S. have advanced NASH with fibrosis. CEO John Milligan said, “We’re committing significant R&D resources towards this public health problem. At AASLD in November, we presented positive Phase 2 data on selonsertib, showing both an improvement in fibrosis scores, and a decrease in progression of disease after only 24 weeks of treatment. Selonsertib is a first-in-class ASK-1 inhibitor and we were pleased with the efficacy seen at a relatively low once-daily dose.”
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Based on these results, Gilead has consulted with regulatory agencies and initiated two Phase 3 studies of selonsertib. One is in patients with F3, and one is in patients with F4 fibrosis scores. Patients with F3 and F4 fibrosis have the greatest medical need, and impose the highest cost on the healthcare payers. In addition, patients with NASH and F4 fibrosis have a median life expectancy of just five years.
The company is also continuing with two other promising agents for the treatment of NASH and other metabolic diseases, GS 0976, an ACC inhibitor, and GS 9674, a FXR agonist. As these programs advance through 2017, Gilead has reported that it may also begin to look at the combinations to determine if two mechanisms, one that hits the metabolic dysfunction of hepatocytes and one that reverses fibrosis, can improve efficacy with an acceptable safety profile.
Acquisitions
While the company’s HCV sales continue to fall it’s now clear that Gilead is on the path to finding strategic acquisitions in terms of its growth. In its latest earnings call CFO Robin Washington stated, “In 2017, leveraging our capital to pursue external opportunities to expand our R&D pipeline is our primary focus. As a result, we will reduce the level of capital dedicated to share repurchases this year and focus a greater percentage of our shareholder return on our dividend.”
CEO John Milligan also said, “Finally, we will continue to maintain our strong operating and financial discipline and focus our efforts in 2017 on continuing to build out our pipeline, aggressively progressing internal programs and pursuing partnerships or acquisitions that are the right strategic fit with our company.”
Gilead has shown it made the right choice with its 2012 acquisition of Pharmasset, a company which was bought for $11.2 Billion. The purchase of Pharamasset brought with it Hepatitis C drugs Sovaldi and Harvoni, both of which have proven to be superstars in boosting the company’s bottom line.
Gilead is now perfectly positioned for another strategic acquisition, here’s why.
Loads of Free Cash Flow
A quick look at the company’s SEC filings of trailing twelve month quarterly cash flows ending September 2016 (below) shows that Gilead had operating cash flow of $18 Billion (ttm) and Capex of $745 million (ttm). That equates to Free Cash Flow of $17.3 Billion (ttm), and based on its current market cap of $90.2 Billion means that Gilead has a FCF/Price Yield of 19% (ttm).
| Fiscal Period (Amounts in millions) | Sep16 | Jun16 | Mar16 | Dec15 |
| Net Income | 3,325 | 3,497 | 3,567 | 4,685 |
| Cash Flow from Operations | 4,330 | 4,940 | 3,913 | 4,874 |
| Purchase Of Property, Plant, Equipment | -198 | -204 | -177 | -166 |
| Repurchase of Stock | -1,000 | -1,001 | -8,000 | -3,051 |
| Cash Flow for Dividends | -623 | -626 | -587 | -614 |
| Free Cash Flow | 4,132 | 4,736 | 3,736 | 4,708 |
(Source, Company reports)
Management has shown that its shareholder friendly by providing a lot of this free cash back to its shareholders through share buy-backs and dividends. Another look at the company’s trailing twelve month quarterly cash flow statements (above) shows that Gilead spent $13.05 Billion on repurchasing its shares and distributed $2.45 Billion in dividends. That equates to a total of $15.5 Billion and a shareholder yield of 17% (ttm) based on the company’s current market cap of $90.2 Billion.
Strong Balance Sheet
The other important aspect in Gilead’s ability to seek out acquisitions is its extremely strong balance sheet. Based on the company’s preliminary FY2016 results (below) Gilead had $32.4 Billion in cash and cash equivalents and zero debt. With $32.4 Billion in cash and cash equivalents and the ability to generate loads of free cash the company is well placed to find the right strategic acquisition.
| Fiscal Period (Amounts in Millions) | Dec16 Preliminary |
| Cash, Cash Equivalents, Marketable Securities | 32,380 |
| Current Portion of Long-Term Debt | — |
| Long-Term Debt & Capital Lease Obligation | — |
(Source, Company reports)
Valuation
As mentioned, the company had $32.4 Billion in cash and cash equivalents and zero debt at the end of FY2016. If we subtract that $32.4 Billion in cash and cash equivalents from the company’s current market cap of $90.2 Billion that means Gilead has an Enterprise Value (EV) of $57.8 Billion.
When we consider that the company generated $17.3 Billion (ttm) in Free Cash flow that means Gilead has a FCF/EV Yield of 30% (ttm).
We favor EV over market capitalization as it includes additional liabilities–like debt, preferred equity and non-controlling interests–if you were to purchase the entire company. EV is calculated as:(Source, Company reports)
Market Cap + Preferred Equity + Non-Controlling Interests + Total Debt – Cash and Equivalents.
With an Enterprise Value (EV) of $57.8 Billion and Operating Earnings* of $17.6 Billion (ttm), that means Gilead is currently trading on an Acquirer’s Multiple of 3.28 or, 3.28 times Operating Earnings*.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
With a FCF/Price Yield of 19% (ttm), a FCF/EV Yield of 30% (ttm), and an Acquirer’s Multiple of 3.28, or 3.28 times Operating Earnings*, that places Gilead squarely in undervalued territory.
It’s also important to note that Gilead currently trades on a P/E around 7 compared to its 5Y average of 20 and the industry average of 47.8. It’s P/S is currently 3.1 compared to its 5Y average of 6.9 and the industry average of 6.2. And, the company is trading at around 5x cash flow compared to its 3Y average of 16.6. That suggests to me that Gilead has been oversold recently.
(Source, Morningstar)
Summary
There’s no doubt that Gilead’s HCV sales are continuing to fall but the company has reported that it still expects FY2017 revenues to be between $22.5 Billion and $24.5 Billion. What seems to be overlooked is that Gilead’s HIV products had one of the company’s strongest years in 2016, led by the rapid adoption of TAF-based regimens. FY2016 new product sales for the company’s HIV and Other Antiviral products were up 17% compared to the previous corresponding period and at the end of 2016, TAF-based regimens made up 37% of Gilead’s HIV prescription volume in the treatment market.
The company is also doing well in terms of its current pipeline. Gilead filed a new drug application for its single-table regimen of SOF/VEL/VOX in December and the FDA granted priority review status with a set target review date of August 8, 2017. Gilead is also continuing advancement of its NASH programs. At AASLD in November, the company presented positive Phase 2 data on selonsertib, showing both an improvement in fibrosis scores, and a decrease in progression of disease after only 24 weeks of treatment resulting in Gilead consulting with regulatory agencies and initiating two Phase 3 studies of selonsertib.
Gilead is clearly looking for and is well positioned for a strategic acquisition. The company has the ability to generate loads of free cash flow with a FCF/Price Yield of 19% (ttm) and a strong balance sheet. At the end of FY2016 the company had $32.4 billion in cash and cash equivalents and zero debt.
In terms of its valuation, this is where I see the real value of Gilead. The company currently trades on a P/E around 7 compared to its 5Y average of 20 and has a FCF/EV Yield of 30% (ttm). Gilead is trading at around 5x cash flow compared to its 3Y average of 16.6 and an Acquirer’s Multiple of 3.28, or 3.28 times Operating Earnings*, that places Gilead squarely in undervalued territory. The company also provides a nice shareholder yield of 17% (ttm) thanks to its aggressive share buy-back program and its distributions.
NOTE: The above EV calculations are based on the company latest earnings release. Our All Investable – Stock Screener may not reflect these calculations until the company’s official filing has been lodged.
Disclosure: I recently purchased shares in Gilead Sciences.
