Gilead Beats Zacks Estimates

Gilead Sciences, Inc.’s ( GILD - Analyst Report ) second-quarter 2012 earnings (excluding special items but including stock option expense) of 94 cents per share beat the Zacks Consensus Estimate of 92 cents. Second-quarter adjusted earnings decreased approximately 1.1% from the year-ago period due to higher-than-expected expenses.

Revenues climbed 12.5% to $2.41 billion, beating the Zacks Consensus Estimate of $2.29 billion. The increase in total revenue was attributable to higher product sales. Foreign exchange (Fx) fluctuations adversely impacted product sales by $31.7 million.

Quarter in Details

Product sales climbed 14% to $2.32 billion, driven by antiviral products, such as Atripla (up 10% to $904.0 million), Truvada (up 10% to $785.9 million), Viread (up 16% to $215.4 million) and Letairis (up 38% to $101.6 million). Products sales were also aided by the launch of Complera/Eviplera last year.

Antiviral product sales for the quarter grew 14% to $2.01 billion. The US market contributed $1.14 billion (up 21%) to antiviral product sales, while Europe contributed $717.4 million (up 3%). Other products including Cayston and AmBisome liposome recorded sales of $111.8 million (down 3.2%).

Gilead’s royalty, contract and other revenues declined 14% to $83.9 million. The decline was primarily attributable to lower royalty revenues from Roche Holding ( RHHBY ) on Tamiflu.

On the operational front (excluding special items but including stock option expense), operating margin declined to 45.2% from 48.4% a year ago due to higher costs. Both research & development (R&D) expenses (up 38.9% to $391.75 million) and selling, general and administrative (SG&A) expenses (up 6.7% to $324.7 million) were on the upswing during the quarter. The rise in R&D expenses was primarily due to Gilead’s efforts to develop its pipeline, whereas SG&A expenses increased primarily due to Gilead’s efforts to expand.

Interest expenses jumped 91.8% to $88.4 million during the quarter. The massive increase was attributable to Gilead’s acquisition of Pharmasset earlier this year.

The company increased its 2012 guidance for net product sales by $200 million. Net product sales are now expected in the range of $8.8-$9 billion.

Neutral on Gilead

We have a Neutral recommendation on Gilead. Our long-term stance is in line with the Zacks #3 Rank (Hold rating) carried by the company in the short run. We remain optimistic on the growth prospects of Gilead's HIV drugs, Truvada and Atripla. We are also encouraged by the approval of Complera/Eviplera, which together with Quad, once approved, will further fortify the HIV franchise and help mitigate the impact of the upcoming patent expirations.

Gilead is looking to combat the threat of genericization by inking deals, making acquisitions and introducing new products. To further strengthen its hepatitis C virus portfolio, Gilead purchased Pharmasset earlier in the year, for approximately $11.1 billion.