Gilead Sciences (GILD) is a company which I have been following for some time. In January 2017 I wrote an article on Seeking Alpha describing why I felt that Gilead Sciences could be a core holding in a portfolio. In today’s post, I’ll be sharing my notes from Gilead Sciences earnings call for the 4th quarter of 2017. This call took place on February 6th, 2018, so it is a bit dated. However, this conference call was particularly useful because it provides initial guidance for 2018 earnings results.
My goal is to provide you as an investor with insight into my process of performing fundamental analysis. As I am sharing my notes in this post, you will gain the most value by doing your own investigation of the company. Perhaps these notes can be used as a means of comparison and to provoke ideas.
The full year 2017 Gilead Sciences Earnings Call
I encourage you to follow along and perform your own fundamental analysis of Gilead. You can find the 4Q 2017 conference call recording on Gilead’s investor website. They also have the 4Q 2017 earnings press release and presentation slides.
Gilead Science’s generally puts together a good set of slides in their quarterly investor presentations. They’re definitely worth checking out.
Anticipated 2018 HCV Revenues and Business Update
Robin Washington in the CFO of Gilead. From an investors perspective, it’s either the CEO or CFO which provide the most useful information. In my experience, Robin is the one that gives the most key insights on conference calls for Gilead in particular.
Robin Washington explains that HCV’s revenues have four key drivers:
- Patient starts
- Net pricing
- Market Share
- Treatment duration
As of the time of this conference call in February, both treatment duration has stabilized at eight-weeks. Originally, Gilead’s HCV treatment was a 12-week regimen. This regimen carried a higher price.
Both net pricing and market share are expected to stabilize by mid-2018. This is good news for Gilead. A new competitor entered the market in late 2017, and has forced prices lower and has stolen market share.
Patient starts will decline steadily going forward. This means that we should expect steadily declining revenues for HCV even after mid-2018.
Tax Cuts and Jobs Act impact
Gilead Sciences had to record a charge of $5.5 billion or $4.16 per share due to the newly passed Tax Cuts and Jobs Act. They have to pay these costs over an eight-year period. If you do the math, that means we can expect $687 million in cash flows to be paid for this one-time tax each year.
Operating Cash Flow and Financial Position
Gilead generated $11.9 billion in cash from operations in 2017. They ended the year with $36.7 billion in cash and investments. Note: This amount of cash exceeds their debt on hand, but only slightly.
Capital Allocation Policy
Paid $2.7 billion in dividends and repurchased 13 million shares of stock for $954 million last year.
Gilead will raise their quarterly dividend by 10% from $0.52 to $0.57 per year. This means we should expect cash flows from dividends to be approximately $3 billion in 2018.
Gilead’s management plans to grow the dividend over time. However, they do not plan to repurchase shares in a way that would reduce shares outstanding. Share repurchases will only offset dilution from stock options. This is not as good. I would prefer if Gilead repurchased shares in a way that reduced the share count. At a minimum, at least they aren’t diluting shareholders.
However, what I don’t like is that they present stock-based compensation as if it’s not a real expense because it’s not a cash expense. Yet, they spent nearly a billion dollars in cash to offset this expense. They outline this in their earnings presentation. It’s just such a shareholder-unfriendly way of presenting things.
Gilead Sciences 2018 Earnings Outlook
Tax rates are expected to be between 21-23%. This is a nice drop from previous tax run-rates. Gilead shareholders should benefit nicely from the tax bill in the long-term despite paying a hefty $5.5 billion one-time tax.
Management considers a 50% plus operating margin as sustainable over time. They would even aspire to a higher number. This is significant because operating margins have been dropping steadily as HCV revenues have fallen.
Gilead considers themselves to be in investment mode. This is useful to know for two reasons:
- We gain an idea of how they will be allocating their capital. Although Gilead’s dividend payout ratio is low, we shouldn’t expect it to rise too quickly while Gilead continues to be in investment mode.
- This also helps explain why Gilead continues to spend a rising amount on R&D. Planned R&D expenditures are 15-20% of expected 2018 revenue. That’s a large amount being invested in the organic growth of the company.
Gilead’s HCV Revenue is expected to become more predictable
This is probably the key takeaway from this earnings call. Gilead’s management believes that their HCV revenue will be a “more predictable, albeit smaller” portion of Gilead’s future according to CEO John Milligan.
Why does this matter? HCV has brought in tens of billions of dollars of profits for Gilead Sciences. This has been hugely beneficial for the company. Yet, falling revenues in one of Gilead’s key business has scared off many investors.
If HCV revenues can both continue to be a part of Gilead’s future and become more predictable, sentiment on Gilead as a stock could change dramatically. Not only that, but a steady stream of income from a source that requires no further R&D can drive a lot of intrinsic shareholder value.
4Q 2017 Earnings call continues to confirm my bullish cash for Gilead
I consider Gilead to have been misunderstood for a while now. This has likely led to its undervaluation at times in the past couple years.
I find it positive that revenues might begin to stabilize, especially the HCV segment. The more HCV revenues stabilize, the less uncertainty I will have in my discounted cash flow models.
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