Gilead Sciences – Improving Here (NASDAQ:GILD)

Shares of Gilead Sciences, Inc. (NASDAQ:GILD) have been trading flattish in recent times, trading hands at levels in their low-sixties. In February of this year, I concluded that the science did not add up, as the company issued a shocking outlook in 2022 after a reasonable 2021. As it turned out, Gilead started the year on a solid foot, driven by pandemic-related sales, yet adjusted for that the performance has been satisfactory amidst low expectations and valuations.

Former Take

Back in February, shares were trading around the $63 mark, basically the same level at which shares trade today. The basic premise of Gilead is that after its transformative cure in HCV, the company has spent billions on targeted acquisitions and share buybacks, both of which have not paid off yet. These efforts were aimed to create value for investors, yet the continued overhang of falling HCV sales continued to cause an overhang on the shares for years now.

While the $11 billion purchase of Pharmassat created the HCV franchise, and has been a huge success, that can not be said for other deals. Some noteworthy transactions include a $21 billion deal for Immunomedics in 2021, with Trodelvy being approved in 2020. A slightly more dated deal includes the $12 billion purchase of Kite Pharma, through which Gilead obtained Yescarta. Other deals include multi-billion deals for Forty Seven and Galapagos, with all these deals adding up to more than a combined $40 billion bill, with no major revenue contribution seen yet.

The company posted 2020 sales at $24.4 billion, up 10% on the year before with growth driven by its Covid-19 drug Veklury, as organic sales otherwise were down 2%, as adjusted earnings came in at $7 and change that year. For the year 2021, revenues rose further to $27.0 billion, far ahead of a flattish revenue guidance originally issued for the year. This was driven by Veklury, whose sales rose to $5.5 billion as that outperformance was driving the total revenue beat.

The backbone of the company, HIV sales fell 4% to $16.3 billion, HCV sales continued to fall by 9% to $1.9 billion, as HBV/HDV sales rose 13% to just below the billion mark, with cell therapy sales up 43% to $871 million, largely driven by Yescarta which posted sales at nearly $700 million in 2021. Trodelvy revenues came in at $380 million in 2021, as adjusted earnings rose slightly to $7.28 per share.

Net debt furthermore fell to $20 billion, as cash flow performance is solid, yet the issue is that the 2022 guidance fell way short of expectations. Revenues were set to fall from $27 billion to $24 billion, based on the assumption of $2 billion in Veklury sales, indicating modest organic sales declines otherwise, with adjusted earnings seen down to $6.45 per share. So despite momentum in Yescarta and Trodelvy, the overall guidance was quite lackluster as I found myself balancing the issue of a soft guidance, with a low valuation, yet I remained fully invested.

What Now?

Since February, shares have largely traded at levels between the high-fifties to the mid-sixties. Other than generally upbeat research results and modest achievements with filings and FDA responses, little news on the corporate front was reported outside the first quarter earnings report.

In April, first quarter results revealed that first quarter sales were up 3% to $6.6 billion. This was quite strong with Veklury sales up 5% to $1.5 billion, as total product sales excluding the Covid-19 drug were up 2% to $5.0 billion. A 2% increase in the core HIV franchise to $3.7 billion was offset by a continued 22% decline in HCV sales to $399 million. Cell therapy revenues rose 43% to $274 million, driven by Yescarta as Trodelvy revenues came in at $146 million, for a near $600 million run rate already.

GAAP earnings only came in at two cents following large R&D impairment charges, yet adjusted earnings came in at $2.12 per share, making the $6.45 per share number of the year look quite conservative. Despite this, the company maintained the full year sales and earnings guidance. In the meantime, net debt fell below the $20 billion mark, now coming in at $19.4 billion, as deleveraging ability is still solid, despite a fat dividend which runs a few pennies short to $3 per share, translating into a very decent dividend yield of nearly 5% here.

A Final Thought

The original 2022 guidance which was issued a couple of months ago was quite underwhelming, yet the strong first quarter was comforting, albeit that the beat was driven by Veklury sales, but even adjusted for that it was encouraging to see non-Veklury sales no longer falling. Notably Veklury and Yescarta seem to have some momentum, as the numbers start to be meaningful enough to start making a contribution to the overall corporate results here.

This tailwind will likely revert to some extent as Covid-19 has been on its retreat in the second quarter, but in some areas of the world the pandemic is on the increase again at the start of the third quarter. This should perhaps provide a boost to the Covid-19 related sales, yet this is of course a bad sign as well as non-Covid-19 product sales will suffer in that case, as the company is furthermore facing competition from many more players now for these drugs.

All in all, we see real stabilization and continued cash flow generation to address the net debt load. Amidst these non-demanding valuations, the issue of capital allocation slowly becomes a real question mark again, despite a solid 5% yield here.