Gilead (GILD) has delivered.
The company’s second-quarter 2015 results showed product sales of $8.1 billion and non-GAAP earnings per share of $3.15, up 27% and 33%, respectively, from the same period a year ago. For those that don’t know Gilead, the company’s hepatitis C powerhouse drug, Harvoni (ledipasvir 90 mg/sofosbuvir 400 mg), led to the quarterly outperformance. We continue to believe the market is 1) underestimating the sustainability of Harvoni (both the number of potential patients to be treated globally and pricing resiliency) as well as its drug development pipeline, which we believe investors are getting for free. Gilead is a holding in the portfolio of the Best Ideas Newsletter, and we don’t expect to make any changes following the report.
The biggest concern investors of Gilead have rests with encroaching competition in the hep-C market from AbbVie’s (ABBV) Viekira Pak, which has resulted in what best can be described as an “exclusivity war” among the pharmacy benefit managers, including Express Scripts (ESRX) and CVS Health (CVS). We’re reiterating our view, however, that a pricing war in hepatitis C is overblown, and we point to a global market of 130-150 million people that have chronic hepatitis C infection. As many as 350,000-500,000 people die each year from hepatitis C-related liver diseases.
Year-to-date, Gilead has only treated ~180,000 US and EU patients with Harvoni or Solvaldi. According to Gilead, “the worldwide potential for an all oral antiviral pan-genotypic HCV cure is sizable with over 12 million infected individuals in commercial markets alone.” There’s plenty of room for a number of players, and there’s a very strong argument that Gilead’s single-pill once-daily Harvoni is not only the most convenient but also the most efficacious (cure rates of 94%-99% versus Viekira Pak’s 91%-100%). Minor market share shifts should be expected within the hepatitis C market, but Gilead is maneuvering the threats incredibly well. There’s no evidence Gilead is facing pressure at all.
Overlooked, however, is other product sales of Letairis (ambrisentan), Ranexa (ranolazine) and AmBisome (amphotericin B liposome for injection), which generated nearly $500 million in revenue during the second quarter of 2015, up from ~$400 million in last year’s period. Not only is Gilead’s antiviral program pipeline advancing well, but the company is also gaining late-stage traction within its budding oncology program. We think investors are getting its drug development pipeline for free, as most remain concerned over the sustainability of the company’s Harvoni revenue stream.
Revenue and earnings momentum continue on a nice trajectory. Gilead increased its guidance for net product sales in 2015 to the range of $29-$30 billion, up from $26-$27 billion in February, as it tightened its product gross margin range. It also expects expenses to be slightly lower at the midpoint of both its annual target range for R&D expenses and SG&A expenses. A lower tax rate will also help earnings during 2015. We value shares north of $160 each.