Gilead Sciences: A Mixed First Quarter (NASDAQ:GILD)

Earlier this month I called for patience with regard to shares of Gilead Sciences (NASDAQ:GILD) as the company ended 2022 on a solid note, while the 2023 outlook felt a touch light. I hoped that this guidance was perhaps conservative, making me upbeat based on the operating momentum and still modest valuation.

As the business posted first quarter results over the past week, it is time for a short update.

Some Perspective

Gilead was a mere $20 stock a decade ago as an $11 billion deal for Pharmasset gave the company a cure for HCV, propelling shares to highs around $100 in the years 2014 and 2015. Ever since, shares have been trading range bound between $60 and $90 per share.

This came as the HCV cure was an absolute blockbuster, yet it was a problem as well given that it cured HCV, not making it a recurrent revenue stream. The company has been offsetting this by building out a big HIV franchise, as the company used tens of billions on multiple of deals in including a $21 billion deal for Immunomedics (through which the company acquired Trodelvy) and a $12 billion deal for Kite Pharma (through which the company acquired Yescarta) as the company made other (multi-billion) deals as well.

The company posted $27 billion in sales in 2021, the second year in a row in which the company posted an increase in sales. That story requires some explanation with Covid-19 drug Veklury contributing $5.5 billion in sales, as organic product sales around $21.5 billion were largely flattish.

This revenue base was dominated by a >$16 billion HIV business, a $2 billion HCV business, HBV/HDV sales of around a billion, strongly growing cell therapy sales and other drugs sales. The company guided for 2022 sales at $24 billion, including a $2 billion Veklury sales component, with earnings originally seen at $6.50 per share.

With the pandemic on its retreat in 2022, Veklury sales came down, but this was offset by growth in the core product line-up, with year-over-year product sales from non-Veklury sales increasing to double digit percentages by the third quarter. In February of this year the company posted its full year results for 2022 with total revenues coming in flat at $27 billion, but non-Veklury sales rose 8% to $23.1 billion. Adjusted earnings rose eight cents to $7.26 per share, as the dynamics of growth were improving.

For 2023, the company guided for sales between $26.0-$26.5 billion, which includes an expected $2 billion in Veklury sales. This suggests that non-Veklury sales are seen up 4-6% which feels a bit soft, as earnings are actually seen down a bit as well to $6.60-$7.00 per share. This might in part be the result of higher interest expenses, because net debt is still coming in at $17.6 billion, as the company hiked the dividend payouts to $3.00 per share.

The hope of the improved core business makes that the business traded at 12 times earnings, as leverage is very much under control and growth dynamics appears to have improved a bit. If the company was conservative in its guidance, I believe that there was a real roadmap for shares to rise to $100 per share, and beyond.

About The Requests

Towards the end of April, Gilead posted relatively soft first quarter results. First quarter product sales fell 3.5% to $6.31 billion which is actually better than it is. Veklury sales fell two thirds to $573 million, down nearly a billion in dollar terms.

Product sales excluding Veklury rose 15% to $5.7 billion which is actually very good. This was driven by strong growth of the HIV franchise (to an important extent on the back of pricing), a 60% increase in oncology sales to $670 million, with the other product segments moving according to their own cadences.

While the non-Veklury sales were solid, the issue is that adjusted earnings per share only came in at $1.37 per share, down 35% from the year before, mostly because of higher R&D expenses and general and administrative expenses. This was the shortfall in the report, if you ask me.

Following the results the company reiterated the full year guidance, with regard to sales ad adjusted earnings, all while net debt is pretty stable at around $17 billion.

Still Upbeat

With shares having slipped from the mid-$80s to $82 in the wake of the earnings report, expectations have come down a bit as the first quarter earnings report has been a bit soft on the earnings front.

The reality is that I am impressed with the sales numbers for the first quarter, but not so much on the margin front, as the company has seen quite some pressure with regard to adjusted earnings per share. For me the recovery thesis remains very much intact, although I am a bit surprised about the shortfall in adjusted earnings per share, yet the thesis to bring shares to triple digit numbers remains intact in my view.