Health and Healthcare

Why Key Analyst Sees More Headwinds for Gilead Sciences

Chris Lange

Published: July 29, 2016 11:05 am

Last Updated: January 13, 2020 5:07 am

The recent performance from Gilead Sciences Inc. (NASDAQ: GILD) has analysts and investors concerned about the future. Currently the stock trades at less than eight times its forward earnings for 2016, which sounds relatively favorable compared to the market, but it very well could be a value trap. Considering this, one key analyst is taking a somewhat negative approach on Gilead.

Argus 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.

The firm also expects gross margins to face pressure from lower revenue per patient in the United States and lower net prices in Europe.

During this quarter, the company received FDA approval for Epclusa, the first pill form, pan-genotypic, single-tablet regimen for hepatitis C. This gives patients with genotype 2 or 3 (representing 25% to 30% of hep C patients in the United States) a treatment that is as effective as Harvoni. Argus also notes that sales of hep C drugs may be in a period of short-term retraction and could stabilize when insurers begin to provide less severely ill patients with access to these drugs.

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.

Shares of Gilead were trading down 1.5% at $80.00 on Friday, with a consensus analyst price target of $106.35 and a 52-week trading range of $77.92 to $120.37.