Gilead Sciences: Earnings Might be a Catalyst to End the Range

Gilead Sciences Inc. (NASDAQ:GILD) has my attention today as we continue with the coverage of options of pharmaceutical stocks this week. Gilead Sciences with its market capitalization of $150.93B is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. The Company’s primary areas of focus include human immunodeficiency virus (HIV), liver diseases such as chronic hepatitis B virus (HBV) infection and chronic hepatitis C virus (HCV) infection, oncology or inflammation and serious cardiovascular and respiratory conditions. The Company has operations in North America, Europe and Asia Pacific.

Source: Google Finance

Stuck In a Range For Six Months

I wrote about trading the options of Gilead Sciences in January 2014 and October 2014. In the October piece, I opined that Gilead Sciences’ Sovaldi is a blockbuster drug and I gave the company a $110 price target by February 2015.

Unfortunately, the shares of Gilead Sciences were caught in a range over the course of the last six months and we were lucky to get out of the trade when the stock made a new 52-week high of $116.83 on October 31 before the contract expired worthless.

GILD Chart

The chart above shows how the shares of Gilead Sciences have traded within the last one year. I have indicated the entry and exit point of my October coverage with the green and red arrows. You will notice that the shares of Gilead Sciences had an impressive uptrend in the first six months of the last one year. However, the stock entered a channel marked with a $98 support level and a $109 Resistance point around August 2014.

Interestingly, the channel seems to be nearing its end as the shares of Gilead trade in a smaller range between $98 and $105. Hence, the possibility exists that Gilead Sciences will break down below $95 or breakout above $110 in the next couple of weeks.

Can Earnings Move Gilead Sciences?

The fact that Gilead Sciences has been stuck in a channel for the last six months has eliminated the opportunity to go long or short the stock. However, as I have mentioned earlier – the stock is now in the tail end of the range and all it needs is a catalyst that will precipitate a breakout or breakdown. I posit that Gilead’s first quarter (Q1 2015) earnings release, which is scheduled for April 30 might be the catalyst needed to move the stock.

Gilead Sciences has surprised positively in nine out of the last 10 quarters and the stock has consistently outperformed consensus earnings estimate in the last 7 quarters. Gilead out performed with an average of 37.53% in the last four quarters and the company is likely to outperform in the first quarter as the consensus analysts’ estimate of $2.78 marks a 93.06% year-over-year increase on the stock.

Strangely enough, the shares of Gilead Sciences dipped after the company released its Q4 2014 results despite the fact that it outperformed the consensus estimates. One of the key reasons behind the dip is the 46% price discount that was announced for Sovaldi up from 22% in 2014. I presume that investors were worried that a 46% discount in Sovaldi will affect the company’s revenue negatively because Sovaldi contributed 42.02% of revenue in fiscal 2014.

However, I think that the price discount in Sovaldi is smart considering the entry of AbbVie into the Hepatitis C market. I strongly believe that the price discount will allow Gilead maintain its 83% market share in the Hepatitis C market and the volume increase in purchases (because of lower prices) will more than make up for the price reduction.

How to Trade GILD Options

I am optimistic about the prospects of Gilead Sciences and I strongly believe that the fears that kept Gilead Sciences range-bound because of price discount in Sovaldi will be erased if the company beats on revenue. I recommend buying GILD call options. You should consider buying the GILD Aug 2015 105.000 call (GILD150821C00105000) at an asking price of $5.50.

 

 

— Daily Option Alerts

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