There were certainly some high points during the year for Gilead Sciences (GILD 2.18%), but with shares basically flat for the year compared to about a 20% gain in the S&P 500, most investors would probably like to just forget 2017 and move on to the year ahead.
Expectations
Much of the pitiful returns came from expectations for the year.
|
Metric |
Feb. 7 Guidance |
July 26 Guidance |
Oct. 26 Guidance |
|---|---|---|---|
|
Net product sales |
$22.5 billion-$24.5 billion |
$24 billion-$25.5 billion |
$24.5 billion-$25.5 billion |
|
HCV product sales |
$7.5 billion-$9 billion |
$8.5 billion-$9.5 billion |
$8.5 billion-$9 billion |
Data source: Gilead Sciences. HCV = Hepatitis C virus.
The sharp drop in February matches with the announcement of initial 2017 guidance. Considering Gilead brought in $32.1 billion in product sales in 2016 with HCV drugs contributing $14.8 billion, the expectations for the year were pretty bleak and deserved the decline.
In July, management increased its overall guidance and even ratcheted up the top end of the HCV guidance, giving investors some hope that sales wouldn't decline as quickly as feared. Unfortunately, management rolled back the top of the HCV guidance in October, causing shares to give back much of the gains that occurred following Gilead's big move a few months prior.
Image source: Getty Images.
An acquisition (finally)
The big move in the stock price at the end of August came from Gilead's announcement that it would acquire Kite Pharma, which specializes in chimeric antigen receptor T-cell (CAR-T) therapies. Investors have been waiting years for Gilead to make an acquisition, and the move seems good given the promising technology, which should boost revenue and profits -- at least, in the long term.
In the short term, the newly approved drug, Yescarta, which it got from Kite, isn't going to cover the additional research costs required to advance Kite's pipeline. Management cautioned investors to expect the acquisition to be neutral to earnings by year three and accretive after that, meaning initial profits from Yescarta won't cover the research and development costs for Kite's pipeline.
If the drugs in development work as well as Yescarta, the $11.9 billion Gilead paid for Kite plus whatever it spends to develop the drugs should produce positive returns in the long term, but it's going to take awhile.
Looking forward
For better or worse, Gilead's near-term future is still tied to its HIV and HCV franchises.
Image source: Getty Images.
The HIV drugs are performing well with the addition of tenofovir alafenamide (TAF)-based drug cocktails. Genvoya, Descovy, and Odefsey, which all swap out tenofovir disoproxil fumarate for TAF, helped sales from HIV and hepatitis B drugs climb to $3.6 billion in the third quarter, up from $3.5 billion in the year-ago quarter. Unfortunately, TAF doesn't extend the patent estate by that much. U.S. patents on Genvoya expire in 2029 while U.S. patents on Descovy and Odefsey expire in 2022 and 2025, respectively. The relatively short patent life left means the increased sales don't contribute as much to Gilead's valuation as they would if investors could see a long runway ahead.
Gilead's HCV drugs have a longer patent life -- Sovaldi doesn't expire until 2029 and Vosevi goes out until 2033 -- but it's facing new competition from AbbVie's (ABBV 2.10%) Mavyret, which was approved in August and can potentially cure some patients four weeks faster than Gilead's drugs. Gilead has many payers under contract, keeping AbbVie from gaining a meaningful penetration into the market last year, but those contracts will be up for renewal soon, which may force Gilead to give further price concessions to keep its market share.
Investors won't have to wait too long to see how management is thinking about the new competition; 2018 guidance should be released when the company presents fourth-quarter earnings on Feb. 6.
If management's expectations for its HCV drugs turn out to be lower than expected, it could end up being a buying opportunity for long-term investors. Between Gilead's CAR-T program, an anti-inflammatory drug in phase 3 development called filgotinib, and its non-alcoholic steatohepatitis program, including selonsertib that's also in phase 3, Gilead is poised to turn around in 2019 even if 2018 ends up being another year investors want to forget.
