Still Liking Gilead, Warts and All

After another quarter in the books, it's still tough find much to complain about with drug company Gilead Sciences (Nasdaq: GILD  ) . On Thursday, Gilead posted second-quarter numbers, showing no major cracks in its strong pipeline and finances. Still, if you look hard enough, blemishes appear.

A few quibbles
Investors could grumble about a few things, aside from more generic complaints -- like, "Why doesn't Gilead pay out any sort of dividend?"

Non-GAAP net income was up 8% in the quarter versus a year ago, and although Gilead didn't release any cash flow statements (tsk, tsk), in its conference call, operating cash flow was reported as only $426 million for the quarter, down substantially from last year's $512 million.

Operating cash flow can deviate from net income gains for a variety of reasons, like the timing of payments from buyers of its drugs, so this could be something minor. That said, I've especially liked Gilead for its increasing cash flows. Until the company's 10-Q filing with the Securities and Exchange Commission comes out, I'll hold my judgment about what declining year-over-year quarterly operating cash flows ultimately mean. No matter what, it's not positive.

On Thursday, Gilead also raised its product sales guidance for 2008 by $200 million. That's OK, but as Gilead tries to steal market share from HIV drug rivals like Abbott Labs (NYSE: ABT  ) and Merck (NYSE: MRK  ) , it's also upping its outlook for research and development and selling, general, and administrative spending. These higher expenses will likely wipe out any chance for any increased sales to fall to the bottom line.

The third negative point is that Gilead's royalty income from Roche's sales of its bird flu treatment Tamiflu fell off a cliff compared with last year. Tamiflu royalties, which accounted for nearly 12% of Gilead's revenue in the second quarter last year, were down 70%. Gilead can hardly be faulted, because its sales are highly dependent on how many governments and other organizations choose to stockpile the drug and other bird flu treatments, like GlaxoSmithKline's (NYSE: GSK  ) Relenza. But declining Tamiflu sales could weigh on Gilead's performance this year.

The final issue to watch is currency changes. Of its revenue this quarter, 3.5%, or $45 million, came purely because of positive currency effects (presumably the falling dollar). If the dollar starts to strengthen again, these same effects could reverse, pressuring Gilead's sales growth.

A little less contrarian
Even with all these, and taking its valuation into account, Gilead's second quarter was strong, with all of its in-house drugs performing nicely and sales of new compounds like pulmonary hypertension (blood pressure) treatment Letairis ramping up rapidly against competition from Pfizer (NYSE: PFE  ) , Actelion, and United Therapeutics (Nasdaq: UTHR  ) .

In Gilead's pipeline, there's one important date for a cystic fibrosis drug candidate in September, and phase 3 data from potential blockbuster resistant-hypertension drug darusentan will come out next year. In short, aside from a few dim spots, there's still plenty to like about Gilead.

Motley Fool Rule Breakers is always on the hunt for hot drug stocks and other cutting-edge picks. See all of our latest discoveries with a 30-day free trial

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. Pfizer is an Inside Value pick. Pfizer and GlaxoSmithKline are Income Investor picks. The Fool has an A+ disclosure policy.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 688286, ~/Articles/ArticleHandler.aspx, 9/16/2014 11:38:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement