Gilead Sciences (GILD) Earnings Report Surprises the Market

gilead-sciences-earningsThe controversial biotech sector continued to be especially volatile in April as investors contemplated the potential for yet another year of outperformance amid warnings of frothy valuations.

But Gilead Sciences’ (NASDAQ:GILD) latest earnings report shows why not all biotech stocks should be treated equally. The manufacturer of HIV/AIDS and hepatitis treatments absolutely crushed analyst estimates in the first quarter. Usually, analysts will be off by a little – perhaps a few million dollars in sales and a few pennies in earnings per share.

Not this time. The company’s new blockbuster hepatitis C treatment, Sovaldi, has been flying off the shelves. In fact, it has been the biggest success off any new drug in history.

Gilead’s revenues in Q1 2014 beat the analyst consensus by $1.5 billion. That’s “billion”, with a “b”. Analysts had expected Sovaldi sales to come in at $800,000 … but they hit $2.3 billion.

Staggering sales meant that GILD’s quarterly revenue was $5 billion versus $3.7 billion consensus. Translated into EPS, GILD beat by a whopping $0.67 (it earned $1.52), a 217% increase over Q1 of 2013.

This stock now trades at just 11-times 2014 estimated earnings, yet is likely to grow EPS by well over 100% this year. Why so cheap? Well, the answer gets to the heart of the debate over biotech stocks in general right now – what comes next?

The Street is concerned that biotech stocks are running out of new blockbuster drugs (needed to maintain such rampant growth as that being enjoyed right now) and that pricing power is going to erode. And in GILD’s case, this means analysts are conservative with estimates for 2015-2018 (the stock trades at under 10-times estimated 2016 earnings of $7.85).

One of the things being overlooked (besides the potential that pricing power doesn’t erode, and that new drugs are likely to keep being introduced), is that massive earnings growth will mean huge cash flow that will swell GILD’s balance sheet.

What is the company going to do with the extra $10 billion in net income that it’s likely to generate over each of the next four years? It can’t rush R&D, but it can buy promising pipelines. This is how it acquired much of its hepatitis B and C portfolio with the $11 billion acquisition of Pharmasset in 2011. That investment is paying off now.

I expect we’ll see GILD make more acquisitions over the next 2 years. And recent deals, including Celgene’s (NASDAQ:CELG) acquisition of a late-stage product for Crohn’s disease from privately held Irish company Nogra Pharma Limited, suggest that we’re entering a stage of more M&A in the broader biotech sector.

In my opinion, GILD remains one of the best buys in the space, and I recommend buying and holding for the long-term.

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Published by Wyatt Investment Research at