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Let’s cover some ground on Gilead Sciences (GILD) third-quarter report.
What management said:
“I’d like to reiterate the positive progress Gilead is making in addressing viral diseases. We will soon have treated 1.2 million HCV-infected individuals around the world, most of whom are now cured. By any measure, this is a profound contribution to global health care delivery. And in the field of HIV, not only are we effectively managing the disease with our new TAF-based regimens, but Truvada is helping more and more people avoid infection. I am confident that we will close out the year with continued strong financial performance underpinned by a passion for operational excellence and our focus on putting the patient first.” COO Kevin Young
The scoop:
The numbers aren’t moving in the right direction at Gilead.
Product sales of $7.4 billion in the third quarter fell from $8.2 billion in the year-ago period, while net income dropped to $3.3 billion from $4.6 billion over the same time period. Non-GAAP diluted earnings per share, which excludes a variety of items including stock-based compensation, dropped on a per-share basis to $2.75 from $3.22 in the same quarter last year.
Though HIV and antiviral product sales grew nicely year-over-year thanks to strength in Genvoya, Descovy, and Odefsey, hepatitis C virus product sales faced considerable pressure, as Harvoni/Sovaldi revenue fell to $3.3 billion compared to $4.8 billion in last year’s period. At the end of the quarter, Gilead had $31.6 billion of cash and marketable securities, while long-term liabilities stood at $28.2 billion.
Details about advancing the pipeline in Gilead’s press release were scarce. The company noted that the European Commission “granted marketing authorization for once-daily Truvada” and that “the European Commission granted marketing authorization for Epclusa, the first pan-genotypic, single tablet regimen for the treatment of adults with genotype 1-6 chronic hepatitis C virus infection.” Gilead has a number of significant pipeline milestones anticipated in 2016 and 2017, but that’s it — there were no more updates in the press release.
The company reiterated its full-year 2016 guidance.
Insight from the quarterly conference call:
“This month we expect cumulative prescriptions of Genvoya to surpass Atripla’s prescription at the same point in time post-approval. This will make Genvoya the all-time most successful product adoption in its first year in the 30-year history of HIV therapy in this country (US).” – COO Kevin Young
“The very nature of R&D is that you often face both closures and progress. Going forward, I’m pleased we now have the ability to focus our attention on development programs in NASH, inflammation, oncology, and HIV. We now have seven new molecules in advanced clinical development.” Norbert W. Bischofberger
“…the bar is high, but we’re very engaged and remain engaged in M&A. When we think about our overall capital allocation, we wouldn’t want to do anything that would constrain us and reduce our flexibility to purchase if we found something that we thought could really grow our top line. So we talk with our board all the time about dividend increases and dividends in general as well as share repurchases, and that’s something that we’ll continue to do.” – CFO Robin L. Washington
Are we changing our mind with our position?:
We no longer hold Gilead Sciences in any newsletter portfolio. We have been concerned about Merck’s (MRK) impact on pricing in the HCV space, and recent comments on the conference call that Veterans Affairs (VA) pricing for an annual regimen of Harvoni/Sovaldi is $15,000-$20,000, a fraction of that of both Gilead’s and Merck’s offerings in non-VA markets, implying considerable downside product pricing risk in the event of political influence.
With HCV product sales under pressure and relatively flat HCV patient numbers (50,000-60,000) for the “fourth consecutive three-month period,” we think Gilead has to accelerate efforts in other therapeutic areas, and transactions may come with a very expensive price tag. Gilead’s shares look cheap by conventional valuation processes, but they are looking more and more like a “value trap,” too, particularly in light of the trajectory of fundamentals.
Find out “Where I Went Wrong on Gilead,” by Brian Nelson, CFA.