Gilead Stock's Great Expectations and Giant Opportunity

Gilead Sciences raked in a massive $3.48 billion from its wonder drug Sovaldi, trouncing Q2 consensus estimates. So why did this stock drop?.

Cheryl Swanson
Cheryl Swanson
Jul 23, 2014 at 9:45PM
Health Care

Today's   earnings report from Gilead Sciences (NASDAQ:GILD), quite simply, knocked it out of the park.  

 Analysts were expecting sales of $2.87 billion for Gilead's hepatitis-C treatment blockbuster Sovaldi. The company handily beat that, and its breakthrough drug gave a huge boost to the quarter's profits and revenue as well. In fact, thanks to Sovaldi, Gilead racked up more profits ($2.36 a share) in the second quarter than it did all of last year.

But instead of the stock revving up, shares dropped 1.6%, to $88.90.

What happened? 

 Just this, there was probably no Sovaldi sales number high enough to prevent a post-earnings stock slump.

Admit it, we've all been there. Sometimes we get sucked into being unrealistic in our expectations. And then, when reality doesn't match up with our fantasy, the knee-jerk reaction is duck, dodge or alter our game plan.

The Street does it frequently. Just ahead of earnings, the Wall Street rumor-mill was churning out sales numbers for Sovaldi as ridiculously high as $4 billion. With that kind of "great expectations," Gilead's stock was bound to dip almost no matter what numbers it reported.

Gilead's long term bull thesis is still intact
Overall, sales for the biotechnology giant for the quarter were $6.53 billion against last year's $2.77 billion. Sales had been expected to reach $5.85 billion for the quarter. The bulk of Gilead's sales were in the United States, and the company plans to expand several drugs' availability to other countries, which should add to its revenue. That's part of the reason the company doubled its forecast. Full-year sales are now forecast to reach $21 billion to $23 billion, from its previous forecast of $11.3 billion to $11.5 billion.

Q2 net income was also impressive, at $3.66 billion, or $2.20 a share, compared with $772 million, or $0.46 a share, for the same period a year ago.

If you expect nothing, you can never be disappointed. But apart from a few monks living in virtual solitude somewhere, we all have expectations. Gilead's results only disappointed because the biotech was already standing on a mountain-top.

More opportunity ahead
In the end, Gilead's earnings (impressive as they were) might not matter that much.

Gilead's continued performance this year is going to revolve around the FDA's decision in October (or sooner) to approve its single-pill combination of Sovaldi and ledipasvir. Gilead's combo pill has been touted as the hep-C treatment everyone's been waiting for. But AbbVie (NYSE:ABBV) is just behind Gilead in getting an interferon-free hep-C regimen to market that will go head to head with Sovaldi. And if AbbVie's treatment comes in at a lower price than Sovaldi, it might grab some market share.  

Gilead shares had been trading very strongly into Wednesday night's earnings report--helped by Gilead buying a lot of its own stock back recently.

Keep your eyes on this giant. Sovaldi could unseat Humira as the world's best selling drug. And with news of the FDA approving Gilead's blood cancer drug Zydelig hitting the wires just a few hours ago, this company still has plenty of room to grow.