Summary
- Gilead's stock finished 2014 on a bit of a low note with shares closing at $94, 19% off its 52-week high.
- Gilead's antiviral business enters 2015 with substantial momentum.
- I expect Gilead to post $11.48 EPS in 2015, 17% above consensus of $9.85.
- Applying a risk-adjusted multiple of 12.5x, this implies a price target of $144 - over 50% upside from its 2014 close.
- Gilead's stock offers a unique combination of value and growth, giving investors the potential to make substantial profits under a favorable risk profile.
Introduction
This article assumes you already have a handle on Gilead's (NASDAQ:GILD) story, one that I will avoid rehashing since various other authors have already articulated it well. Instead, I'll get down to the brass tacks and focus on the assumptions and insights that support my investment thesis that Gilead is very likely to beat consensus EPS handily in 2015.
I view 2015 as presenting precisely the opposite scenario - expectations have now become overly conservative setting up investors for excellent upside. I fully expect the business to continue to thrive this year, and if it does, the stock could appreciate roughly 50%, doubling last year's performance.
My EPS Projections for FY14 and FY15
Gilead will report Q414 earnings in a couple weeks. I'm projecting they will earn $2.28 (+/- $0.15) on $6.75B (+/- $300MM) in revenue, driven principally by strong domestic sales for the Hepatitis C (HCV) franchise (Sovaldi and Harvoni), increasing international HCV sales, and continued growth in the HIV franchise. If my projections prove accurate, Gilead will have posted $7.96 EPS in FY14. Looking forward to 2015, substantial upside still remains. While the consensus is looking for 2015 EPS to climb about 25% to $9.85 (per E*Trade), I believe this is based on overly conservative assumptions. Applying reasonable, not aggressive, assumptions, I fully expect Gilead to earn over $11 this year ($11.45 to be precise). You may be wondering how they can possibly surge from just under $8 EPS in FY14 to a lofty $11+ in FY15 after coming off of a blockbuster year of growth and now facing HCV competition, AbbVie's (NYSE:ABBV) Viekira Pak, as well. I'll walk you through it.
Below is a bridge quantifying the drivers that I expect will propel Gilead's earnings forward this year, followed by commentary supporting each driver.
| FY14 Projected EPS (assumes $2.28 in Q414) | $7.96 |
| HCV franchise: US growth | +$1.89 |
| HCV franchise: international growth | +$0.62 |
| HIV franchise growth | +$0.66 |
| Share repurchases | +$0.25 |
| Oncology growth | +$0.07 |
| FY15 Projected EPS | $11.45 |
Supporting commentary for bridge:
- HCV Franchise (U.S. Growth): ABBV's Viekira Pak has now hit the market, and we only have a few weeks of script estimates (as reported by both IMS and Bloomberg/Symphony), but thus far the product's sales appear to be aligned with the general consensus that it will likely earn somewhere around a 5% share of the HCV market. This will be a minor headwind to Gilead, with the bigger impact being the influence on pricing now that there's competition in the market. However, I expect these two factors will be greatly overshadowed by the total HCV sales volume growth Gilead will realize in 2015. At an analyst event at the recent JP Morgan Healthcare Conference, Gilead's management was cited by both Citigroupand RBC analysts as having suggested that based on new agreements with payors, the system could potentially accommodate 200-300k patients being treated in the U.S. this year, up from an estimated 140k in 2014. That's a highly encouraging viewpoint from Gilead, and directionally makes sense to me as the "system" was likely holding back quite a bit in 2014 waiting for (a) the single-pill regimen (Harvoni) and (b) competition to hit the market in order to take advantage of more competitive pricing. Total scripts are already hitting all-time weekly highs over the past few weeks, and that should continue, as Harvoni's launch is still maturing and new payor agreements are just starting to take effect. If we stay well on the conservative side of Gilead's range and assume patient volume increases to 233k in 2015, that would imply total HCV 2015 U.S. sales of $15.2B (assumes 20% discounting, 45% of genotype 1 (GT1) patients are treatment-naive and eligible to use the 8-week regimen of Harvoni, and 30% of patients are non-GT1, most of which will be prescribed Sovaldi), up from about $10B in 2014. If ABBV takes 5% market share, this would leave Gilead with $14.4B in domestic sales, an increase of about $4.4B over 2014. This would drive $1.89 in incremental EPS (assumes 19% tax rate and 85% gross margin on HCV franchise).
- HCV Franchise (International Growth): The European Commission approved Harvoni in mid-November 2014. Per Gilead's presentation at the recent JP Morgan Healthcare Conference, Spain and Italy have just recently been launched, and the full-scale launches for France, Germany, and the UK will occur in Q115. In addition, Japan (a very important market with an HCV population of 1.2MM, many of whom are elderly and need immediate treatment, according to Bristol-Myers Squibb) is widely expected to approve Harvoni in the second half of 2015. These will be the key drivers of international growth this year. I admit international sales are by far the biggest unknown in my estimates, given the lack of visibility to script data in these markets. However, according to Gilead's Q314 10-Q, Sovaldi was running at over 21% ex-U.S. sales in Q314. The HCV franchise should be able to maintain a similar level of contribution in 2015. This view is conservative relative to estimates I've seen thrown around by industry analysts, which have suggested ex-U.S. sales at 25-35% contribution in the 2015/16 time frame (this would likely require Japan to be fully launched). If Gilead can do just 20% in 2015, that would equate to $3.6B in international HCV revenue, growth of roughly $1.6B year over year. Assuming margins are somewhat tighter internationally, this could drive another $0.62 improvement in EPS.
- HIV Franchise Growth: Gilead's HIV revenues have been growing steadily at better than a 10% annual clip due to the success of their single-pill regimens (Stribild and Complera). Further, the company announced a10% price increase for HIV and oncology drugs at the start of the year. Assuming a slight increase in sales growth and tailwinds from the favorable pricing, I believe 15% growth in HIV is reasonably attainable in 2015. That should add $1.5B in revenue and roughly $0.66 EPS.
- Share Repurchases: Gilead authorized $5B for share repurchases toward the end of last year, and given the cash flow machine they've become (they should approach $15B free cash flow over the coming year), it's likely this will continue to be a primary means of putting the cash to work in 2015. Depending on exact timing and share price movement, each $1B worth of shares repurchased during 2015 should translate into roughly $0.05 additional EPS. RBC analyst Michael Yee has suggested that authorizing a repurchase of up to $10B would be a reasonable response to the influx of cash. I believe that's possible, but I will stay on the more conservative side and assume they do $6B in repurchases next year, adding $0.30 in EPS.
- Oncology Growth: Gilead dipped their toe into the oncology market in July 2014 with the accelerated approval of Zydelig, which is used to treat three types of blood cancers. The drug is in the early stages of its launch and is expected to grow rapidly, eclipsing the $1B sales mark before the end of the decade. Note that Zydelig also saw a price increase this year and should see sales grow to over $150MM in 2015, adding another $0.07.
Gilead Offers a Highly Favorable Risk-Reward Profile
By no means does Gilead come without its risks - it has plenty, including further HCV competition from Merck (NYSE:MRK) that could cause meaningful erosion of market share and/or drive prices lower, longevity of revenue streams for both the HIV and HCV franchises, and patent disputes. However, if Gilead does trade at a 12.5 PE as I've suggested (a substantial discount to the current S&P 500 PE of 19), I believe that would be an appropriate discount for the consideration of these risks.
I believe a pretty heavy bear case in 2015 would lead to $9 EPS. One hypothetical combination of factors that would limit Gilead to $9 EPS would be: 200k total HCV patients treated in the U.S. in 2015, 25% weighted average discount rate for both Sovaldi and Harvoni, ABBV taking 15% of 2015 HCV market share, and international HCV contribution of just 15%. Along with reduced EPS, let's assume for this bear case that GILD's risk profile deteriorates substantially and the market compresses its PE ratio down to 10. If all of this came to fruition, that would still leave investors holding a $90 stock, about 10% downside from the most recent closing price.
On the flip-side, a heavy bull case with total U.S. patients treated closer to the high end of Gilead's maximum estimate of 300k, combined with favorable international performance in HCV, could take EPS into the $13-14 range in 2015. If we apply what I would consider a best-case PE of 13.5, that could yield a stock price of somewhere in the neighborhood of $180. It goes without saying that this scenario, as well as the bear case, is quite unlikely to occur.
While we can quantify and analyze what Gilead will earn this year, we can't predict market sentiment, which will dictate their multiple. If I had to set a price target, I would assume a 12.5 PE, which applied to my estimated EPS of $11.48 yields a price of $144, more than a 50% increase from GILD's 2014 closing price of $94.
In summary, my view is that GILD offers substantial upside and relatively limited downside as it stands today. That kind of risk profile is rare and highly attractive, which is why I've been maintaining GILD as a core holding since last April.
By Phoenician
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