3 Critical Things to Watch in Gilead Sciences' Q4 Results

By Keith Speights Markets Fool.com

Gilead Sciences' (NASDAQ: GILD) shareholders anxiously await February 7 to arrive. That's the day the big biotech announces its fourth-quarter results. Will Gilead be able to halt its nine-month slide in stock price? Here are three critical things to watch when the company provides its fourth-quarter update.

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Image source: Getty Images.

Rate of change in combined hepatitis C sales

It's a foregone conclusion that Gilead will report yet another drop in sales for Harvoni and Sovaldi. What's more important to watch than these figures, though, is the rate of change in the sales of the biotech's combined hepatitis C virus (HCV) franchise.

There are two key things to note in this metric. First, look at the rate of change -- not just the year-over-year change itself. Second, look at the HCV franchise as a whole -- not just the loss of sales for Gilead's two top-selling HCV drugs.

Data source: 10-Q and 10-K filings. Chart by author.

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As the chart above shows, the launch of Epclusa has added a significant amount of revenue for Gilead. However, the combined HCV franchise sales are still on a downward trend. If the rate of decrease is reduced in the fourth quarter, it would be good news for Gilead even if the year-over-year numbers aren't so great. A slowing rate of decrease in HCV sales would mean the bleak sales deterioration is probably near stabilizing.

Sales erosion of older HIV drugs

Gilead has rolled out several powerful new TAF-based HIV drugs in the last 13 months. Genvoya launched in late 2015, with Descovey and Odefsey following in early 2016. Sales of all three drugs are growing, especially for Genvoya.

However, investors should watch how significant of an impact these TAF-based regiments are having on sales of Gilead's older HIV drugs. In particular, Genvoya could cannibalize Stribild's market share.

Viiv Healthcare, a joint venture of GlaxoSmithKline, Pfizer, and Japanese drugmaker Shionogi, is nipping at Gilead's heels. Sales for Viiv's two HIV drugs, Tivicay and Triumeq, increased 70% in the third quarter of 2016 compared to the prior-year period.

Gilead also faces competition from generic HIV drugs. While a generic version of Bristol-Myers Squibb's Sustiva won't hit the U.S. market until December of this year, generics are already available in Canada and Europe. These generic rivals could affect sales for Gilead's Atripla.

Although most of the focus is on Gilead's HCV drugs, its HIV franchise still contributes nearly half of the company's total revenue. Gilead needs continued solid performance from its HIV drugs to help offset falling sales for Harvoni and Sovaldi.

Cash flow

In my view, one number encapsulates Gilead's strengths better than any other: its cash flow. If you want to be able to assess the company's overall financial position at a quick glance, just look at its operating cash flow. Even better, subtract Gilead's capital expenses from that number to calculate its free cash flow.

Gilead is in an enviable position with the amount of cash it has. Its strong free cash flow makes the company even stronger -- and steadily adds to its cash stockpile. I expect the biotech's free cash flow for 2016 to be in the ballpark of $16 billion.

If this estimate is too high, it indicates Gilead experienced a particularly painful fourth quarter.The company reported $19.6 billion in free cash flow in 2015, so there will definitely be a decline year over year. However, if Gilead's actual free cash flow for last year is at least $16 billion, it's still an impressive result that should mean Gilead will have plenty of money for share buybacks, dividend increases -- and hopefully a few acquisitions in the not-too-distant future.

Looking ahead

Speaking of acquisitions, the subject will probably be the 800-pound gorilla in the room when Gilead holds its fourth-quarter earnings call. Investors are clamoring for the big biotech to make a move quickly. So far, Gilead CEO John Milligan has talked about the company's disciplined approach to deal-making with no indication of how soon an acquisition might happen.

Unless Gilead actually announces that it's buying a smaller biotech before it announces fourth-quarter results, I wouldn't count on Milligan sharing much more than he already has. But the tension is building. My hunch is that Gilead will make a deal sometime in the first half of this year.

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Keith Speights owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.