Things may be looking up for Gilead Sciences (NSDQ:GILD) ahead of their second quarter earnings results as earnings have been promising in the biotech sector so far. One of the sector's ETF iShares NASDAQ Biotech Index (NSDQ:IBB) has rallied over 2.4% on the back of impressive numbers from a host of biotech companies. Gilead announces its own set of numbers on the 25th of July where $3.02 will be the number expected for earnings and a top line number of $7.8 billion. Even if Gilead manages to hit these numbers, it would be a decline of 4.1% in earnings and 5.4% in revenue when compared to the corresponding quarter in 2015. However, the market feels that Gilead is in line for a tough 2016 - especially on the HCV side of the business.

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Furthermore, although Gilead has had strong competitive advantages up until now, its HIV franchise is also expected to come under pressure in the near term as important patents are due to expire shortly with the first one occurring in 2018. The one saving grace is that the stock is down 14.3% year to date compared to the biotech's sector decline of 18.2% (see chart). This should be happening as Gilead is cheaper than the industry with an earnings multiple of 7.4 compared to the industry's average of 39.3. However, valuation is one thing but fundamentals are another which is why the company needs to convince the market in its upcoming earnings that its fundamentals are still attractive and forward-looking at present.

Source: GILD stock price vs IBB price chart by amigobulls.com

Gilead Needs To Convince The Market Of Its HCV Sales As They Have Been Declining

The first obvious area that investors will be tuning in for will be the HCV division which had a poor first quarter showing. First quarter HCV sales dropped to $4.3 billion (a 6% decrease) and comprised of a whopping 40% slide in US sales and 13% in European markets. Bullish analysts pointed to the ultra buoyant Q1-2015 HCV figures as being the primary reason for the slide in turnover but there may be other factors at play here.

Firstly, therapy duration times are getting shorter and competition is growing in this sector (Zepatier). I'm not stating that Gilead is not well versed in this area (it holds 90% of the market with drugs such as Harvoni, Sovaldi and Epclusa) but its second quarter earnings will need to convince the market that sales have stabilized and guidance is firm.  Epclusa has just been approved in Europe after gaining approval in the US last month. This market still has ample runway for growth but can the company convince the market that it will hold onto precious market share?

HIV Combo Approvals Should Result In Gains Ahead

On the HIV side, again guidance will play a huge part as currently it is evident that the division is losing market share to the likes of Tivicay. However, with a string of combo treatments for HIV approved this year, Gilead should now be able to offer a bigger set of options which should lead to higher sales over time. Tivicay from Glaxo seems to be in the driving seat in HIV treatment at present. It got approved in 2013, is based on the simpler two drug treatment model and proclaims much milder side effects that Gilead's Truvada. This is why Gilead's newly approved drugs and the phase 3 data of a Tivicay equivalent (probably not due for some quarters yet) are crucial to stop Glaxo gaining more market share over the near term

Value Investors Will Focus On Long-Term Fundamentals

Value investors will be watching earnings with interest as the stock has low earnings and sales multiples compared to the industry plus its balance sheet is very strong. The company has presently over $8.32 billion on its balance sheet and it pulled in almost $20 billion in free cash flow last year. The dividend is growing nicely (2.17% yield) and the reason why value investors would be interested here is not just because of the company's fundamentals but also the sector fundamentals. The present payout ratio is only 14.7% and buybacks are continuing in spades. Therefore, as a value investor, I would be looking for any information that can stem its losses in HCV (where the company derives most of its income). The company has the balance sheet, is still strong in HIV but now it has to convince the market that the likes of Harvoni and other initiatives can stabilize HCV sales going forward.

Takeaway

To sum up, Gilead has a lot to prove in its upcoming second quarter earnings. It looks like a real "value" play but major headwinds in the HCV division are resulting in the market not being interested at present. Bulls emphasize its strong R&D budget which has traditionally led to gains over the long term. This is what value investors will be hoping for.