Why Analysts Are Thinking M&A Is Back on the Table for Gilead

Gilead Sciences Inc. (NASDAQ: GILD) reported its second-quarter financial results after the markets closed on Monday. In the report we saw weakening trends in the hepatitis C vaccine (HCV) segment, as well as slipping sales in other areas. Overall, the report was not good and investors took to dumping the stock. On the other hand, this could provide a buying opportunity since shares are just off of their 52-week lows. 24/7 Wall St. has included a few of the major highlights from the earnings report as well as what analysts are saying after the fact.

The company 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.

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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. HCV product sales, which consist of 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 showed how 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.

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A few other analysts weighed in on Gilead after the fact:

• Needham downgraded it to a Hold rating from Buy.
• Credit Suisse maintained its Outperform rating but cut its price target to $115 from $120.
• Leerink maintained Outperform but lowered its price target to $114 from $120.
• Jefferies maintained a Hold rating and lowered the price target to $94 from $97.

Shares of Gilead were down about 8% at $81.41 on Tuesday, with a consensus analyst price target of $110.05 and a 52-week trading range of $77.92 to $120.37.