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Gilead Sciences: A Bull That Moved Bearish

 5 min read / 

Gilead Sciences (NASDAQ: GILD) a research-oriented biopharmaceutical organisation, which is specialised in the discovery, development, and commercialization of innovative medicines, was in the news recently, since its share price went to a considerably low level, especially in a historical sense. On the other hand, the company maintains a huge cash pile that could potentially be used for M&A practices.

It’s clear that this doesn’t make any sense. Why would a biopharma share price decrease when there is a huge potential for M&A and positive development of the organisation? This article analyses the recent developments, the current situation, and gives a short-term outlook on whether a potential investor should buy, hold, or sell this share.

Recent Developments

Evidently, Gilead Sciences has been facing a race to the bottom in terms of its share price movement in recent months. The share price opened at $72.34 on January 3rd, 2017; however, it further decreased to $64.81 as of the writing of this article. That’s a negative change of 10.41% in only five months time. This initial downward trend commenced on June 25th, 2015, when the share price had its all-time high of $122.48. This indicates that the share price of Gilead Sciences was almost cut in half almost two years after its all-time high.

The main reason for this decline is related to the companies’ hepatitis C virus (HCV) franchise that has been shrinking in terms of value throughout recent years. Relatively, investors were highly disappointed after Q1 financial results, since revenue and earnings further declined in comparison with Q1 2016.

This is hardly surprising as product sales declined by 16.98%, while net income attributable to Gilead and diluted earning per share indicated a decrease of 24.23% and 18.97%, respectively. In more depth, the HCV portion of product sales was the main catalyst behind the decline which the company admitted in its Q1 2017 financial release.

HCV product sales went down by 39.53% in a single year. Moreover, the stake of HCV product sales related to the overall product sales went down from 55.98% to 40.77% in the equivalent time period, which means sales and margins are decreasing. It seems the cash cow is becoming a lazy dog that should make room for a new star to rise.

On the other hand, cash, cash equivalents, and marketable securities increased from $32.4b (Q4 2016) to $34.0b (Q1 2017), which is equivalent to an appreciation of 4.94%. The full disclosure can be seen in the overview here.

This huge cash pile, stock repurchases, and extra cash dividends indicate the corporation is up to something and this might be the right moment for the contrarian investor to step in. The remainder of this article indicates the potential for investors and why an investment should be on the front of a long-term traders’ mind.

The Current Situation

At the moment, the company is still not performing as it should be. Last month, the share price fell by 4.73%. However, it seems the dark days are behind us, as a late stage success of an HIV single tablet drug regimen came to the forefront and upcoming pipeline successes are on the way.

Moreover, Q1 results actually show the current drug R&D stages and it has great potential for the upcoming period. A number of drug developments are moving further in the pipeline and this is going to deliver some great revenues in the near future.

Nevertheless, there is significant uncertainty related to the huge cash pile that is still visible on the companies’ books. Trump’s tax overhaul and the possible delay of the tax reform plan may have a negative impact on the company, as much of Gilead’s cash mountain is located overseas. The implementation of the plan would make it more tax beneficial to move cash back to the United States to further use it as an input for acquisitions or pipeline expanding; however, the tax plan seems to have a delay.

A crucial question that comes to the forefront now is how Gilead Sciences is performing when it is compared with its direct competition in terms of share price development. In short, not bad. It’s evident that Gilead Sciences performance is decent when compared with its direct competition. Previously, the Q1 2017 results were highlighted and while the company experienced a great period from 2012 until 2015, the bullish trend didn’t last.

Short-Term Outlook

In the future, Gilead Sciences has great bullish share price potential. Although the HCV franchise portion is declining, the company has upcoming drug projects in the pipeline that are experiencing great progress, according to Gilead’s latest quarterly results. Furthermore, the company has a huge cash pile that can be used for further pipeline expansion and potential mergers and acquisitions. The analysts confirm this potential in the charts here.

From these charts, most analysts give a hold or strong buy recommendation. Moreover, a consensus forecast of $87 is given for the share price in the near future.

Nevertheless, there is quite some uncertainty related to Gilead Sciences, especially if the huge cash pile is analysed. Most of its cash is situated in non-US countries and the company will have a rough period ahead as long as the US tax reform is not executed yet. Time will tell what will happen with Gilead’s revenues, earnings, and share price movement.

The author of this article assumes the share price will move to the consensus forecast level because new drug innovations are moving further in the pipeline, which result in a better revenue position and in the end in an improved net income. Furthermore, the situation could be of an even more bullish nature if Trump’s tax plan is implemented in the near future.

Will this thirst for acquisitions allow the biopharmaceutical bull to rein free again and leave its bearish tendencies behind? Yes, that could definitely be the case; however, there is quite some uncertainty in store after the share price reaches the consensus forecasat level.

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