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Don’t Abandon Gilead Stock After Weak Q4 Results

Josh Enomoto

On paper, pharmaceutical giant Gilead Sciences (NASDAQ:GILD) is off to a solid start this year. So far in 2019, GILD stock is up over 4%. While that’s not very impressive, GILD also pays out a 3.9% dividend. So in total, the owners of Gilead stock should receive healthy, double-digit-percentage returns in 2019.

The Outlook of Gilead (GILD) Stock Remains Upbeat

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Of course, that assumes that Gilead stock will continue to rise. But after examining the situation more closely, that appears to be unlikely. Since early February, GILD has fallen 8%. Moreover, Gilead stock has formed a bearish trend channel since October of last year. Making matters worse, the GILD bulls seemingly have no argument that can stop the decline of GILD stock.

As if stakeholders needed any more bad news, the company’s fourth-quarter earnings per share came in below expectations. Against analysts’ consensus earnings per share estimate of $1.74, GILD meekly delivered $1.44. Conspicuously, its Q4 EPS dropped 19% year-over-year.

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The revenue picture wasn’t that much better for GILD stock. Sure, the company beat out the consensus estimate, which called for $5.52 billion,  with a $5.8 billion haul. Unfortunately, the sales beat was overshadowed by the fact that the company’s revenue fell nearly 3% versus the year-ago quarter.

Most painful of all were product sales, which also slipped 3% YoY, to $5.68 billion. In particular, the revenue of Gilead’s hepatitis C drugs tumbled 51% YoY to $738 million.

Pouring salt on a festering wound, the company’s hepatitis B treatments fell by double-digit-percentage levels, declining to $797 million. Unsurprisingly, Gilead stock tumbled after the earnings report.

But what’s truly worrisome about GILD is that after more than a month,Gilead stock still hasn’t recovered. With Gilead’s new CEO, Daniel O’Day, at the helm, should investors hold onto GILD stock, or sell their shares?

GILD Stock Has Priced in the Bad News

I don’t blame shareholders for feeling jittery. Although O’Day has a strong, relevant track record given his time at Roche (OTCMKTS:RHHBY), he’s in an unenviable situation. To prevent further damage to Gilead stock, the new leader must address the fallout from the large decline of the company’s hepatitis C revenue, as well as diversify his company’s product lineup.

This is much easier said than done. A key reason why the markets punished GILD stock was that the company was essentially too successful. To put it bluntly, pharmaceuticals have almost no incentive to cure diseases. Instead, managing them and making victims of the disease continuously obtain the drugs will guarantee recurring income.


Gilead took a radically-different approach. Rather than manage hepatitis C, its Sovaldi drug cured the disease. That seemed like a bad business move, considering that rival AbbVie (NYSE:ABBV) has a similar drug. The key difference between the treatments is that AbbVie’s offering is ineffective, but profitable.

Indeed, when you look at Gilead’s Q4 results, you can’t help but second-guess its management. Nevertheless, I don’t think giving up on GILD stock is necessarily the right answer.

Although the company has steep challenges ahead, I’m encouraged by the relatively modest volatility of GILD stock. Since Q4, Gilead stock is down 8%. That’s a significant decline, but it’s not devastating, particularly because  GILD’s  key money maker appears to have weakened so much.

Moreover, I find it interesting that GILD stock is staying above its long-term support line that extends back to 2013. Again, if Gilead has really incurred anything close to a fatal blow, it’s not showing up in the charts.

Secondly, the Q4 report demonstrated that the company has the potential to turn things around. The revenue of its HIV treatments — including Biktarvy which demonstrates strong potential — grew meaningfully, gaining 21% to $4.1 billion. Also, its immunotherapy cancer drug, Yescarta, raked in $264 million in 2018.

The Long-term Outlook of Gilead Stock Is Positive

If you look at the GILD stock price over the last five years, and compare it to the progression of the company’s top line, you’ll notice that they generally align with each other. After absorbing some tough spills, Gilead has generated meaningful momentum with its new-drug pipeline. Eventually, Gilead’s share price will likely rebound as well

More importantly, I think that management’s decision to find effective cures for diseases was correct. Although Gilead stock is taking some hits due to the loss of revenue from its hepatitis C treatment, the drug proved that Gilead’s science actually works. In the long run, that’s an invaluable (and exclusive) brand message that GILD can exploit.

And what about AbbVie’s hepatitis C drug that manages the illness? ABBV may have outperformed GILD in the past, but today, it’s in a worse situation. So far this year, ABBV is down more than 12%.

In other words, within the broader healthcare industry, the science eventually matters. While GILD stock isn’t perfect, I have confidence that this proven company can work out its pipeline issues. The same can’t be said for the competitors that merely tow the line.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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