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Gilead a future dividend goldmine?

April 25, 2017

The HCV drugs have provided a big boost to sales for GILD but that advantage is fading.

The rest of GILD’s drugs are doing nicely, only the oversized HCV sales make it look like GILD is struggling.

While not a CCC List candidate yet, GILD is still growing its dividends nicely and looks to be able to continue doing that.


Gilead Sciences Inc (NASDAQ:GILD) is a drug company that might seem to be struggling, but that is due to the outsized performance of its HCV drugs, which investors should have expected to return to more normal levels. Because of expected sales declines, the current market price offers a nice opportunity to pick up what will become a solid dividend growth stock.

Is GILD a good investment partner?

GILD is a drug company that saw tremendous growth in its sales when it was the first to release treatments that had a high likelihood of curing Hepatitis-C infections. HCV infects a lot of people around the world, and prolonged infection often leads to enough liver damage that a transplant is required. Because of the high costs for a transplant and being first to market a cure, GILD was able to make a lot of profit off of its two drugs, Harvoni and Sovaldi. Such a success had the intended effect of attracting competitors, and that competition drove down prices. Also, because of the original high price, mostly the sickest patients got the new drugs, but with lower prices healthier people sought treatment as well. That led to the average time on the drugs needed to cure the patient decreasing, further depressing sales.

Lots of dividend growth investors, myself included, look at David Fish’s CCC List to find dividend growth stocks. However, sometimes it can pay off to find a company that will be on the list in the future and buy it now. GILD has only been paying dividends since 2015, so it does not yet qualify for inclusion on the CCC List. However, I think it has the potential to make the list soon and that it could be a good opportunity to buy it now. So I will look at the fundamentals of GILD the company and see how it is doing addressing the items on my checklist: growing markets, growing profits, managing debt well, and supporting a growing dividend payment.

While I am willing to look around for some of the information I want to evaluate a company, I much prefer a company that tells its investors the information I want. So I first looked at the latest earnings conference call slides from GILD to see what the company had to say about the points in my checklist. This presentation is worth looking through because it contains a lot of useful information about GILD, including several slides on GILD’s drug pipeline, but I will include only those slides that address the items in my checklist.

This first slide provides several important pieces of data. First, it’s obvious that the HCV business is falling off. That’s to be expected as competitors have entered the market, so GILD can expect both contraction in market share and lower prices. Equally important is that GILD’s other product categories are growing in sales. I like that R&D spending is up, as GILD is using the extra profits from HCV products to research more drugs to continue to grow the company after HCV isn’t such a cash cow. The margin contraction is also a product of growing competition in the HCV market.

The slide above shows that the trends from the 4th quarter compared to a year ago pretty much applied over the whole of 2016. I do like that outside the HCV product category sales expanded in the low double digits. While the growth in those areas isn’t enough to replace the lost HCV sales, it’s still a good sign for the future.

The slide above shows two other points about GILD’s market. First, I see that antivirals other than for HCV are growing. That’s a good sign, as the way I see it is that GILD got a great short-term boost from being first to market with an HCV cure, but that wasn’t ever going to last. So they need to be growing other products, and using that bonus share of the market and the profits it generated to grow the other parts of the company.

The other thing that I see in the above slide is that while overall sales were declining over the last year, that isn’t what happened in the U.S. It remains to be seen whether the US market just peaked later, or whether sales in that market will continue to increase. This is important, because the U.S. market is more profitable than most other markets, as many of them have price controls.

This slide, while it does show the decline in sales of HVC treatments, shows something I think it also important. It shows the sales of the new drug Epclusa. While Harvoni and Sovaldi treat the most common pheno-types of HVC, Epclusa is effective against all pheno-types, and it’s the first drug to be able to cure some of those different pheno-types. That both opens the potential for new sales for GILD and allows GILD more freedom in setting the price. So far, the new drug hasn’t been able to stop the sales declines, but it has certainly slowed them.

In the slide above we can see the changing product mix for GILD. So far, much of the change has been due to decreased sales of HCV products, but with that segment now only being half of sales, the other products will not have to work as hard to offset the lost sales from HCV.

The slide above shows the changing dynamics of the HCV market. It shows why GILD was able to generate such high sales and profits initially and why that couldn’t continue. With large numbers of the sickest patients already cured, the willingness to pay high prices declined as did the length of treatment. This slide also shows that markets do work. The initial demand created enough profit incentive to attract a developer of the treatment. That lead to big profits for the company first out with a treatment and caused others to get into the market too. The increased competition then lowered prices, which allowed people with a lesser need to also get the treatment.

The slide above provides further details on Epclusa, GILD’s latest treatment for HVC. For now, it has no competitors, but they are already in development as well.

This slide shows several items that I like. The most important is that GILD has a pretty large pile of cash on hand. I see plenty of cash flow generated between the last 2 quarters, a good thing. I like that inventories are going down. I also like that the number of shares outstanding is declining. I can’t tell if the reduction in accounts receivable is good or not. If it’s because a larger percentage of customers are paying faster, that’s good. If it is just because they are selling fewer products, that is less good.

This next slide demonstrates how much the HCV market has dominated GILD’s recent performance and how that market will shrink due to competition and generally curing lots of people. The lower market starts are also the result of other medicines in this space, as patients now have other treatments to choose from. The shorter duration is in part because Harvoni is more effective and because patients are on average healthier now when they start treatment. The increased competition effect is due to lower prices. I look on the HVC market as one that had an initial large amount of sales that were the reward for developing a treatment first, and that now sales are returning to a more normal level. I suspect that the release of Epclusa will have a similar but much smaller effect (since the number of patients who can’t be treated with current medications is much smaller than was the case before the introductions of the first cures).



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