Gilead Sciences, Inc.'s (NSDQ:GILD) CEO John Milligan spoke at Morgan's Stanley's Global Healthcare conference recently. His stance on the company ties in perfectly with my assumptions of where this company is at present. The whole hullabaloo surrounding Gilead at present is that the company will post top line declines in 2016. It hasn't done this in more than a decade. After posting poor HCV sales in the second quarter along with reduced annual guidance of $29.5 - $30 billion, Gilead stock has found itself down by more than 10% or roughly $10 a share since the end of July.

However, investors and the market alike should analyze stocks over a longer time frame than one year. Fundamentals of Gilead stock over a 10 year time frame are excellent. In fact, 2016 and maybe 2017 will go down as years of transition for this stock. However, share price movement is another thing altogether and this is where investors need to stay alert. Why? Because once the market either sees accelerating growth in existing drugs or searing growth in new pipeline drugs, Gilead stock price will take off. Gilead stock is currently trading at a price to earnings ratio of 7 which is 15 points lower than its 10 year average. Let's discuss how over time this multiple should expand.

TAF Fundamentals Look Very Bright Going Forward

Firstly, fundamentals look very strong for the TAF side of the business. These regimens include products such as Genvoya, Odefsey & Descovy. Genvoya, for example, is the most prescribed drug in the US for switchers as well as patients who are new to antivirals. Some bearish analysts have stated that TAF has only started so well because Gilead hiked its prices on its TDF regimens which may be true but a good ploy in my opinion. TDF patents begin to expire in 2018 so Gilead will want to keep as many of its customers on older treatments as possible. Furthermore, the new generation of single tablet regimens are safer than the TDF lineup so there is more scope here for patients using competitors offerings to switch over. Remember there is at least 20%+ of HIV patients currently in the US not being served by Gilead's HIV treatments. I think shareholders could get a nice surprise in this area when third quarter earnings are announced.

Bictegravir Could Become A Game Changer If It Gets Approved

Investors should also look at the growth rates of integrase inhibitors of competitor GlaxoSmithKline to get a sense of the potential that exists with combination regimens. John Milligan went on record stating that bictegravir will become the best triple combination therapy on the market. This pipeline drug is currently in phase 3 trials and management feels that it will be able to file for approval by the middle of next year. Glaxo's offerings in this space are Triumeq and Tivicay which have been growing like gangbusters. If Milligan is correct on his assessment about the quality of Bictegravir, then Gilead should be able grow its earnings for a good number of years in the HIV space.

HCV Sales Helped By China & Patient Demand Will Eventually Bottom Out

With relation to HCV sales, investors need to come to terms with the fact that 2015 will go down as being the peak year for sales in this space. Will HCV continue to be the main driver of Gilead's sales going forward? Probably not. However, this doesn't mean it will cease to be a cash cow for the company. In fact, infections in the US have increased meaningfully over the past 5 years. Personally, I feel this complex will settle down in the quarters to come. Screening tests are increasing which, over time, has to lead to consistent patient inflow. Gilead could never sustain the boom it had in this area in 2015. A record number of patient starts flooded the market and sales grew accordingly. However, a bottom will come and what I sense from management's comments is that cash flow from this division going forward will be used to build out other pipelines. Investors shouldn't forget that China (where Sovaldi is not available yet) will become another growth avenue in this space. Over 30 million cases have already been reported which illustrates the potential here for Gilead to increase share in the market.

Summary

To sum up, Gilead has the balance sheet to reinvent itself in coming quarters. HIV single and combination products have the potential to dominate this market. The HCV side in the short term may be a bit more tricky but sales declines will eventually bottom out. The danger here is waiting for revenue growth in order to invest as the market may price Gilead stock much higher based on an acquisition or in house research. Downside risk is limited for Gilead stock, in my opinion.