Health and Healthcare

How Analysts Changed Tune on Gilead After Earnings

Chris Lange

Published: July 31, 2016 10:25 am

Last Updated: January 13, 2020 5:05 am

Gilead Sciences Inc. (NASDAQ: GILD) reported its earnings at the beginning of last week, and since that time there has been much analyst activity around the stock. Questions are being raised about whether hepatitis C vaccine (HCV) sales will recover, how the HIV drugs will perform and even if this company is a value trap. Over the week analysts have come to a few different conclusions, and we have included those as well as highlights from the earnings report.

On Monday after the close, Gilead said that it had $3.08 in earnings per share (EPS) on $7.78 billion in revenue. The Thomson Reuters consensus estimates had called for $3.02 in EPS on revenue of $7.79 billion. In the same period of last year, it posted EPS of $3.15 and $8.24 billion in revenue.

As for full-year guidance, the company now expects to have revenues in the range of $29.5 billion to $30.5 billion, compared to the previous level of $30.0 billion to $31.0 billion. The consensus estimates call for $12.02 in EPS on $31.05 billion in revenue for the full year.

HIV and other antiviral product sales were $3.1 billion, compared to $2.7 billion for the same period in 2015 primarily due to increases in sales of tenofovir alafenamide (TAF) based products. Sales of HCV product — Harvoni, Sovaldi and Epclusa — totaled $4.0 billion, versus $4.9 billion from last year.

Merrill Lynch said in its report that it has a Neutral rating, but the firm lowered its price objective to $100 from $105. One interesting aspect after this report is that Merrill Lynch indicated that Gilead may now be more open to an M&A strategy. The report said:

Gilead repurchased $1 billion of stock in open market in the second quarter of 2016 after the $8 billion buyback in the first quarter of 2016. With a strong balance sheet consisting of $24.6 billion in cash and nearly $5 billion in quarterly operating cash flow, Gilead has plenty of flexibility in executing business development. That Gilead anticipates share repurchases in the second half of 2016 to be lower than the first half of 2016 suggests the company may be more open to acquisitions. In our view, Gilead will stick to its strategy of building a long-term pipeline through acquisition of a string of early-to-mid stage development assets and be opportunistic about M&A.

Wells Fargo even said that the HCV product trends were weakening, with low pipeline visibility. The investment bank has a Market Perform rating but cut its valuation range to $80 to $86 from the prior range of $98 to $111.

Later in the week, independent research firm Argus weighed in on Gilead as well. It downgraded Gilead to a Hold rating, based on slower product sales. As recently as May the price target for this biotech giant was a whopping $150, but it appears that the tables have turned. Although there were some positive signs in the company’s second-quarter results, including strong sales of new HIV drugs, Argus believes that the headwinds are blowing harder than the tailwinds for Gilead and that a Hold rating is now appropriate. Argus detailed in its report:

Although Gilead does not provide EPS guidance, it lowered its 2016 product sales forecast to $29.5-$30.5 billion from $30.0-$31.0 billion. Management raised its forecast for R&D spending, but projected lower SG&A expenses. It also said that it expected a greater impact on EPS from acquisition-related and up-front collaboration costs and stock-based compensation. In addition, it expects share repurchases in 2H16 to be lower than in 1H due to increased R&D spending. As noted above, we expect gross margins to face pressure from lower hep C revenue per patient (due to payer discounts and shorter periods of treatment) and lower net prices in Europe.

Along with the downgrade, the firm lowered its adjusted EPS estimates to $11.80 from $12.20 for 2016 and to $12.10 from $12.90 for 2017. The consensus estimates are $11.79 in EPS in 2016 and $11.76 in EPS in 2017.

Quite a few other analysts also weighed in on Gilead after the earnings report:

• Barclays reiterated an Overweight rating.
• Maxim Group has a Hold rating.
• BMO Capital Markets reiterated a Market Perform rating with a $98 price target.
• S&P Equity Research reiterated a Strong Buy rating.
• RBC Capital Markets reiterated an Outperform rating and lowered its target to $105 from $120.
• Credit Suisse reiterated a Buy rating and lowered its price target to $115 from $120.
• Robert Baird reiterated an Outperform rating and lowered its price target to $122 from $135.
• Piper Jaffray has an Overweight rating and lowered its price target to $108 from $114.
• Jefferies reiterated a Hold rating with a $93 price target.

Shares of Gilead closed trading at $79.41 on Friday, with a consensus analyst price target of $106.35 and a 52-week trading range of $77.92 to $120.37.