Gilead Sciences: A Very Core Holding
Aug. 2, 2019 6:11 AM ET | About: Gilead Sciences, Inc. (GILD)
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Summary
Gilead reports relatively resilient second-quarter sales.
Revenues are up on an annual basis again, as are earnings.
Strength in HCV, Yescarta and pipeline boost is encouraging.
A strong balance sheet, compelling value and green shoots make me a happy holder with a near 4% dividend yield to compensate for.
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Gilead Sciences (GILD) has been making some moves which create some enthusiasm, although that still has to be reflected in a higher share price. The company of course recently closed a high-profile deal with Galapagos (NASDAQ:GLPG), as Yescarta sees a steady increase in sales, and revenue declines have come to a halt.
Reasons enough to update the constructive thesis, which I have long held on Gilead after reviewing the recent events, as I still like the prospects at current levels amidst emerging green shoots.
About The Galapagos Deal
Halfway July, Gilead announced a transformative deal with Galapagos in a multi-billion-dollar deal. Deal terms for the 10-year R&D collaboration are quite complicated and lengthy. Key details include that Gilead will make a $3.95 billion upfront payment and furthermore invest another $1.1 billion in the shares of Galapagos.
In exchange, Gilead will receive product licenses for all current and future programs outside of Europe, with the rights of Galapagos being limited to Europe. The closer scientific partnership and cash infusion should accelerate the discovery process as Galapagos has stressed its desire to remain independent. The deal is full of additional milestone payments as well as relative fat royalties for Galapagos on non-European sales, ranging up to 20-24% of sales.
The $1.1 billion investment in the shares boosts Gilead's stake in Galapagos from 12.3% to 22.0%, as the company has the option to further expand the stake to 29.9% over time. Yet here is a 10-year standstill agreement in this deal under which Gilead is not allowed to increase its stake beyond this percentage. The $1.1 billion investment made around EUR 140 and change per share is already paying off; currently valued at EUR 156. This makes the entire stake of Gilead in Galapagos worth about $2.8 billion.
About The Second Quarter
Gilead reported relatively resilient second-quarter results with total revenues up 0.7% on the year to $5.68 billion, even as royalty streams were down a bit. This solid result came after first-quarter results which were up a little bit as well, marking a true halt to the steep revenue declines witnessed in recent years.
Growth is driven by the HIV product line, which saw revenues increase from $3.7 to $4.0 billion, which shows that after years of reliance on HCV sales, Gilead is now becoming reliant on HIV. Talking about HCV, sales fell from a billion to $842 million amidst competitive dynamics (read prices) and lower patient starts.
The company furthermore reports sales of "other" drugs, a category which includes quite a few individual names. Sales of these drugs as a group fell from $807 million to $604 million on the back of two patent expirations: Ranexa and Letairis.
Yescarta, the drug acquired with the purchase of Kite, contributed $120 million in sales in the second quarter. This number compares to sales of $68 million in Q2 of last year. Sequential revenue growth remains solid enough as first-quarter sales came in at $96 million. At this rate, the company is already on track to do half a billion in sales, more than 2% of total revenues.
The Earnings
On the back of the modest increase in sales, or better said the sales stabilisation, Gilead managed to grow reported operating earnings from $2.28 billion to $2.43 billion. The company managed to grow net earnings from $1.82 billion to $1.88 billion as a small reduction in the share count resulted in earnings per share increasing $0.08 to $1.47 per share. Adjusted earnings totalled $1.82 per share, although a sizeable part of the discrepancy results from amortisation charges.
On the back of the improved operating performance, the company is hiking its full-year sales guidance by $300 million to $21.6-22.1 billion. Based on the GAAP earnings performance in the first half of the year, the company could earn about $6 per share. Realistic earnings might come in even a bit higher as a result of the fact that some adjustments to the GAAP earnings seem fair.
Ending the quarter with $30.2 billion in cash and equivalents, the company operates with a very modest net debt load of little over a billion. While this will increase a bit following the Galapagos deal, leverage is anything except a big worry for investors in Gilead.
Some Encouraging Signs
After years of revenue declines, it is evident that Gilead has now stabilised the franchise. While growth in the HIV franchises is encouraging, it creates a new reliance/dependency problem as well, although this franchise looks steadier than HCV. While Yescarta is moving ahead a bit slower than originally expected, I think that progress in the second quarter was good, as the drug could start to contribute meaningfully in the coming quarters if this pace of improvements could be maintained.
While HCV is no longer seeing huge declines, it is disappointing to see declines at the other drugs, as some progress in the pipeline (or that of Galapagos) is very much welcomed in the near term.
With GAAP earnings running at $6 per share already and realistic earnings even a bit higher, needless to say that valuations are non-demanding at $66, or 11 times earnings while the balance sheet remains very strong by all means. During the whole downturn, Gilead has now been able to stabilise the sales and thus earnings, as it of course made a huge move with the $12 billion deal for Kite and a multi-billion-dollar deal with Galapagos, while preserving the integrity of the balance sheet. With HIV being very strong and the company making progress with the pipeline, there are many things to like at this point in time.
Hence the company remains a core holding for me given the value argument amidst green shoots and a near 4% dividend yield.