Gilead Sciences Might Finally Be On Its Way To Higher Stock Prices (NASDAQ:GILD)

When looking at the last few weeks, we can make statements about Gilead Sciences Inc. (NASDAQ:GILD), which we could seldom make in the last few years. Gilead Sciences not only outperformed the market, but we also had a streak of nine up days in a row. Looking at the last three months, Gilead Sciences performed great and especially since the beginning of July 2024, Gilead Sciences started to outperform the S&P 500 (SPY).

My last article about Gilead Sciences was published at the end of May 2024, and since then, the stock increased 22% and clearly outperformed the S&P 500, which gained only 5% in the same timeframe. I was bullish in my last article, but I was also bullish in previous articles, and of course we should not just look at the last few months. When looking at the last five years, the picture is completely different. In the last five years, Gilead Sciences increased only 23% (without dividends) while the S&P 500 increased 94%.

Let’s look at Gilead Sciences once again and ask the question if the stock can continue its outperformance in the coming months and quarters or if the stock will turn again in the next few days and weeks and remain in the range between $60 and $90 (as it has for several years).

Quarterly Results

As always, we start by looking at the last quarterly results and for starters the company did beat estimates this time – revenue by $210 million and non-GAAP earnings per share even by $0.41. And for Gilead Sciences, this is surprising, as the company often missed EPS estimates in the last few years.

Total revenue increased from $6,599 million in Q2/23 to $6,954 million in Q2/24 – resulting in 5.4% year-over-year growth for the top line. As always, almost the entire revenue stemmed from “product sales” while $41 million stemmed from “royalty, contract and other revenues”. And while the top line increased in the mid-single digits, operating income increased even 58.8% year-over-year from $1,665 million in the same quarter last year to $2,644 million this quarter. And diluted earnings per share increased from $0.83 in Q2/23 to $1.29 in Q2/24 – resulting in 55.4% year-over-year growth. We could also look at non-GAAP diluted earnings per share, which increased from $1.34 in Q2/23 to $2.01 in Q2/24 – exactly 50% year-over-year growth.

The income statement is looking great, but there is one item we should pay close attention to – the free cash flow. In Q2/23, free cash flow was $2,199 million and declined 45.7% year-over-year to $1,195 million this quarter.

When looking at sales in more detail, it is obvious that the biggest part of revenue is still stemming from HIV sales. In the last quarter $4,745 million in revenue stemmed from HIV sales – resulting in 68% of total revenue. And especially Biktarvy is “problematic” as it is responsible for almost 50% of generated revenue and such a huge part of revenue depending on one single product or pharmaceutical is posing risks for a business. In Q2/24, Biktarvy generated $3,232 million in revenue out of $6,954 million in total revenue.

But as pointed out during the earnings call, Biktarvy is continuing to gain market shares, which is a good sign. CCO Johanna Mercier commented during the last earnings call:

Highlighting our leadership position, Biktarvy represents more than 49% share of the treatment market in the U.S. This was up almost 3% year-over-year, our 24th consecutive quarter of year-over-year market share gain. With a meaningful share lead over all other branded regimens for HIV treatment, Biktarvy firmly remains the HIV treatment-of-choice, particularly for those starting or switching regimens in the U.S., as well as across other major markets. Overall, the HIV treatment market continues to grow in-line with our expectations of 2% to 3% annually.

Oncology

Aside from HIV sales, there are two other major segments growing with a high pace – one is Liver Diseases, which increased revenue from $711 million in the same quarter last year to $832 million this quarter – resulting in 17.0% year-over-year growth. The second segment growing with a high pace is Oncology. In the second quarter of fiscal 2024, revenue was $841 and compared to $728 million in the same quarter last year, this resulted in 15.5% year-over-year growth.

As pointed out in its last Resource Book from August 2024, Gilead Sciences is improving its oncology pipeline since the acquisition of Kite in 2017 and Immunomedics in 2020. And recently, Gilead Science has also begun developing and collaborating with several companies on early-stage assets in inflammation. And in the last five years – since the current CEO, Daniel O’Day – the clinical portfolio especially increased in oncology – from a pipeline of 12 in Q1/19 to a pipeline of 29 in Q2/24.

In the last few years, seven new products in oncology were introduced and right now, it is especially Trodelvy contributing to revenue in the segment. In the last quarter, revenue was $320 million and compared to $260 million in the same quarter last year this is an increase of 23.1% year-over-year.

And as pointed out during the last earnings call, management has high expectations for Trodelvy and plans for the future:

We are working to expand Trodelvy’s reach beyond the 40,000-plus patients treated to date across multiple tumor types as we look to new and existing markets, as well as new indications. In bladder cancer, we are planning to further discuss the results of TROPiCS-04 and next steps with FDA. At this time, Trodelvy continues to be available under an accelerated approval in the U.S. for second-line plus metastatic or advanced bladder cancer.

Anti-Obesity Drug

And while the oncology portfolio is one of the reasons to be optimistic about Gilead Sciences, there are other reasons – but these are rather speculative at this point. Especially Deep Value Ideas pointed out in an article published a few weeks ago, that one of the reasons for Gilead Sciences’ recent rally might be due to Gilead’s GLP-1 receptor agonist GS-4571, which showed promising results. The drug candidate was tested in humanized GLP-1 receptor mice as well as obese cynomolgus monkeys and in one month, a weight loss of 5% to 8% could be achieved.

But as pointed out in the article by my fellow contributor, we are talking about a very early-stage drug, and it will most likely take five years or more at this point before Gilead Sciences has a marketable product. And while I am clearly about long-term investing, it seems rather speculative at this point – or put a little different: We should not just invest in Gilead Sciences because it might enter the anti-obesity market at some point in the next decade. But I can understand that potential anti-obesity drugs can lead to excitement and positive sentiment for a stock (and company) as anti-obesity drugs are sometimes described as the AI of pharmaceuticals. Novo Nordisk (NVO) and Eli Lilly (LLY) – the two dominant players – are clearly high-quality businesses and deserve a high valuation multiple. But at this point, we can see signs of a hype.

Growth

When talking about growth, we can start by looking at management’s full-year guidance for fiscal 2024. And while estimates for revenue remain unchanged – Gilead Sciences is expecting revenue to be between $27.1 billion and $27.5 billion – estimates for non-GAAP diluted earnings per share were raised and are now expected to be in a range of $3.60 to $3.90 (compared to $3.45 to $3.85 in a previous guidance).

And not only management is getting more optimistic. It is interesting that analysts are also getting more and more optimistic – they are actually getting more and more optimistic for about four years now. When looking at the revisions for revenue estimates over the last few years, we see a bottom in 2020 and since then estimates for the years to come constantly increased. It is actually interesting that the stock price did not improve. Usually, analysts getting more optimistic is contributing to a more positive sentiment, which is often driving the stock price higher.

However, when looking at the same chart for earnings per share, the picture is a little different. While estimates were also raised over the last few years, it is less obvious, and this might also be one of the reasons while we don’t see a clear uptrend for the stock price so far. Nevertheless, analysts are quite optimistic for Gilead Sciences and expect the company to grow its bottom line in the mid-single digits in the years to come.

Intrinsic Value Calculation

One final, but important step to make a qualified decision whether a stock is a good investment or not is to calculate an intrinsic value for the stock. And when trying to determine if a stock is over- or undervalued, we can start by looking at simple valuation metrics. The price-earnings ratio is fluctuating quite heavily, and hence the P/E ratio is rather useless for determining if Gilead Sciences is fairly valued or not.

Instead of looking at the P/E ratio, we can also look at the price-free-cash-flow ratio, which actually increased in the last few quarters. Right now, Gilead Sciences is trading for about 14.3 times free cash flow, which is higher than the P/FCF ratio in the last few quarters, but overall, still a reasonable valuation multiple.

But, as always, we are rather using a discount cash flow calculation to determine an intrinsic value for the stock. And in my opinion the intrinsic value we get from a DCF calculation is much better than just looking at simple valuation multiples. We are calculating with the last reported number of outstanding shares (1,251 million) as well as a 10% discount rate. And as basis we can use the free cash flow of the last four quarters, which was $6,896 million. For the years to come, we should not expect a high growth rate, but in my opinion a low-to-mid single digit growth rate seems realistic (4% for example). And when calculating with such a growth rate from now till perpetuity, we get an intrinsic value of $91.87 for Gilead Sciences.

We could also be a little more optimistic and calculate with the average free cash flow of the last five years (as the trailing twelve-month number is rather low). And when calculating with a free cash flow of 8.51 billion (all other assumptions being the same), we get an intrinsic value of $113.38 for Gilead Sciences and the stock is still undervalued at this point.

And in my opinion, Gilead Sciences is still a good investment – and there is one major reason why I think Gilead Sciences is one of the few companies we can invest in right now – compared to most other companies and stocks I only see as a “Hold” at this point.

Recession

The reason is Gilead Sciences’ ability to perform well during recessions and bear markets. Of course, this is no guarantee, however it seems like the stock and company are protected in two different ways.

On the one hand, the stock seems to be trading for rather low valuation multiples (although 14 is not extremely cheap) and is in a bear market for several years now. And stocks which are already in a bear market will often decline less steep in case of a recession or overall bear market than stocks trading for extremely high valuation multiples.

Additionally, Gilead Sciences seems to be rather recession-resilient – like most other pharmaceutical companies. And in case of Gilead Sciences, we can expect the business to keep its revenue (and maybe also free cash flow) stable during a recession as the products Gilead Sciences is selling will be used in a similar way during recessions as during boom times. People still have serious illnesses during recessions and will need the necessary medication.

But we should not assume that Gilead Sciences’ stock price will not be affected by a steep bear market. Most likely it will decline as well – but maybe the decline is less steep and maybe the stock will recover quickly.

By the way, the performance during the last recession where Gilead Sciences clearly outperformed the overall market is not representative of “typical” recessions. In the last recession, Gilead Sciences clearly outperformed the major indices in the United States, but that was only because the recession was going hand-in-hand with a pandemic and one of Gilead Sciences’ experimental drugs (at stage II at this point) could be used to treat COVID patients.

And when looking at the chart for 2020, we see that the performance reversed in the second half and while the stock market recovered again, Gilead Sciences continued to go lower and actually declined 10% at the end of the year.

Conclusion

I remain bullish about Gilead Sciences and still think the stock price is not justified, and the stock should trade at least for $100. We can be optimistic that the oncology portfolio will contribute to growth and Biktarvy will keep its leading position and also profit from overall market growth. I would not bet on Gilead Sciences also becoming a major player in the anti-obesity market, but that is not necessary for the stock being a good investment at this point.

And we should not ignore that Gilead Sciences is still paying a high dividend yield (almost 5%) and as long as we are waiting for the stock to finally move higher, we are at least paid a solid dividend. And of course, other pharmaceutical companies are also paying higher dividends, but the dividend yield of Gilead Sciences is one of the highest among the major pharmaceutical companies. And this is one more argument for buying the stock.

By the way, I remain confident that Gilead Sciences will also be able to break out of its range and move higher than $90 at some point in the next few quarters.