Gilead Sciences (NASDAQ: GILD) reported fourth-quarter earnings after the market close on Feb. 5 and the stock price fell 2% the following day. Although the company beat expectations at the top line, profits and earnings per share both disappointed, and guidance for 2020 underwhelmed investors.
With the stock trading close to its multi-year lows, the results provided little cause for optimism that things would be turning around at any time soon.
Gilead reported another mixed set of earnings results
Both bullish and bearish investors could find some solace in the results. On the negative side, profitability suffered due to an increase in costs and expenses with non-GAAP (adjusted) earnings per share falling 10% year over year versus expectations of positive 10% growth. Gilead’s hepatitis C virus (HCV) franchise –- historically its main profit engine — continued to suffer, with overall revenues down 15% in the quarter. And guidance for next year came in on the light side of expectations, suggesting little to no growth for 2020. For someone who holds Gilead shares, patience seems to be turning into more of a vice than a virtue.
But the long-term investment thesis remains intact
At the same time, however, the results contained some silver linings for the long-term bull. Revenues increased, continuing their trend over the last several quarters, and reversing the many years of declines which took the stock down close to 50%. Gilead’s HIV franchise continues to be industry-leading, with revenues up 12% year over year. And this leadership is likely to continue: Management expects that Biktarvy — its industry-leading HIV drug — will continue to be the preferred treatment option through the next decade.
Nor will expense pressures continue into next year. The margin hit that Gilead took in the fourth quarter was caused primarily by one-off inventory writedowns associated with its HCV drugs. Gilead does not expect this to be repeated next year and anticipates gross margins returning to the 86% to 87% level, which was the norm in prior quarters.
The longer-term investment case for Gilead remains intact. The HCV franchise will be less of a drag on earnings while Gilead continues to develop its diverse pipeline across promising hepatitis B, non-alcoholic steatohepatitis, oncology, and immunology products. Management also highlighted China as an opportunity for growth, with eight products approved since 2017 and four recently approved for reimbursement in 2020.
Gilead also has been aggressive in looking externally for product opportunities and has entered into 33 strategic partnerships and investment transactions since January 2018. It has a long history of making acquisitions, and its track record in this area has been exemplary — the best example being its acquisition of Pharmasset in 2011 for $11 billion, which generated $25 billion in profits over five years.
Not only does management have the will to make the necessary changes, but it also has the means: It has net cash on its balance sheet courtesy of over $25 billion in cash and marketable securities. Free cash flow has been more than sufficient to fund dividend growth and share buybacks. Gilead announced an 8% hike in its dividend for 2020, making it five consecutive years of dividend growth. With the health stock yielding more than 4% and trading at a little more than 10 times earnings, Gilead is priced for little or no growth. It may well surprise on the upside.
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