Gilead reported Q4 2016 yesterday and it finally looks like the disaster everyone was anticipating. Big declines in revenue, sales of the HCV products are dropping like a falling stone (flagship product Harvoni with over 50% Q/Q decline). To make it worse, management was anything but determined or showing any signs of leadership in the conference call. The guidance for sales in 2017 was dropped to $23.5 B (from $30 B in 2016). Adding a pending law suit with a potential one time payment of $2.5 B – $7.5 B plus a 10% license royalty of all HCV sales and I’m finally at a point where I’ve to think about my initial investment.
When assessing the situation, it’s important for me to remember the initial investment thesis. When I started to accumulate GILD, I bought it for the low P/E and the growing cash reserves, which I thought, would be used to buy another revenue producing assets.
So trying to be objective – there is no change in my thesis. Even though I’m still waiting, cash is still pouring in, but the cash source dries up faster than expected and the once promised HIV pipeline doesn’t show the long term quality I was hoping for (there seems to be two important patent cliffs before 2020). So I’m going from an optimistic to a more speculative view. I’m still hoping for an acquisition, which would at least stabilize the revenue. But in the meantime I will collect the increased dividend (by 10.6 %) payment. I really don’t hope to enter another Seadrill / Kinder Morgan type of “catching the falling knife” episode. But I really don’t see the case here – even with increased competition. I still see a future Gilead finding new cures and enhancing their existing products. I don’t see them falling back to the pre-HCV company, but utilizing their new sales experience, grown R&D department and liquidity.
Therefore today I added 50 shares at $64.82 to my existing GILD position. My averaged cost per share gets lowered to $78.17 and I’ve added $104 to my annual dividend income.