"Stupid cheap," I asserted after it fell to $84 a year later.
As the price has continued to slip -- and the company's business metrics have gradually worsened, I've whistled past the graveyard. I trumpeted management's M&A record. I speculated about potential buyouts to reignite growth. And so much more.
But after holding the stock for almost four years -- and pounding the drum for it for even longer -- I finally liquidated my position earlier this month. Here's why.
Declining business metrics
Gilead's Hepatitis C franchise was always going to be a bit of a flash in the pan. Given that Gilead's HCV drugs are functional cures for the disease, we always knew the ramp up would be quick -- and when patients rolled off treatment, it'd be difficult to source new patients to treat. Still, the drop-off was more precipitous than I'd expected -- in 2017, Gilead's Hepatitis C sales clocked in at $9 billion (still quite a fall-off from the heady days of 2015); 2018's expectations are between $3.5 billion and $4 billion.
What's more, growth in Gilead's core HIV business has ground to a halt, with flat revenue year-over-year last quarter.
That's led earnings per share to drop off a cliff. In 2015, Gilead churned out $8.90 in normalized diluted EPS. By the end of 2017, that had fallen to $6.53, per S&P Capital IQ. (I'm using normalized EPS because it strips out the massive hit to earnings from Gilead's acquisition of Kite Pharma.) And based on the company's performance so far this year, there's every reason to think that trend will continue through the rest of this year.
Management's counter can be summed up in this quote from CFO Robin Washington on the Q1 earnings call (quote also courtesy of Capital IQ): "We do believe that 2018 is a trough year for us on which we can grow. We'll have seasonality fluctuations from quarter-to-quarter, but we're very confident since we reiterated our overall guidance for the year and expect to be able to grow off of our 2018 base going forward."
I still believe in management's ability to grow the business...
For what it's worth, I buy what Gilead's CFO is claiming. Gilead has a number of big growth opportunities -- chief among them cancer and nonalcoholic steatohepatitis (or NASH -- a liver disease) treatments.
Kite Pharma's lead drug candidate Yescarta netted its first approval for third-line large B-cell lymphoma. That's not a huge opportunity on its own, but Gilead is pushing the drug forward in testing for a number of other indications, and analysts see the drug netting peak annual sales as high as $2.7 billion in the coming years.
But Gilead didn't pay up for Kite merely to get Yescarta. Gilead's management believes that Kite's platform will churn out all kinds of next-generation cancer drugs beyond Yescarta. Gilead is rapidly acquiring other technology to combine with Kite's in the hope that it can figure out how to reduce side-effects and boost efficacy, a necessary combination if Yescarta will break into earlier lines of therapy.
NASH is another long-term opportunity with a huge patient population and several billion dollars in annual peak sales opportunity once someone figures out how to treat it. If all goes well, Gilead's lead drug candidate selonsertib might be on the market as soon as 2020, and we'll have a sense of whether its proposed combination treatment is worth additional consideration in the next year or so. Given Gilead's history of treating liver diseases like Hepatitis B and C, there's good reason to be bullish on management's ability to identify the right drug(s) to treat this terrible disease.
...but I see better opportunities in the market
The problem for me is that Gilead pretty clearly has years left until it can return to meaningful growth. Yescarta might generate significant sales as early as 2020, with selonsertib adding meaningfully to things by 2021 or 2022. That's...well...a while.
And in the meantime, there are plenty of other companies that are better investments for my cash -- companies that are executing now and have fewer questions about their future growth prospects. And, as I already learned last year, it's important not to hold on too long when your investing thesis has fallen apart. Consider whether there are companies in your portfolio (whether or not they're Gilead) that have similarly failed to meet your expectations, and whether it's time to let them go as well.