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Gilead Sciences, Inc.’s (GILD - Analyst Report) third quarter 2012 earnings (excluding special items but including stock option expense) of 95 cents per share beat the Zacks Consensus Estimate of 90 cents. The company’s third quarter 2012 adjusted earnings decreased approximately 2.1% from the year-ago period due to higher expenses.

Revenues climbed 14% to $2.43 billion, beating the Zacks Consensus Estimate of $2.33 billion. The increase in total revenue was attributable to higher product sales. Foreign exchange (Fx) fluctuations adversely impacted product sales by $20.5 million.

Quarter in Details

Product sales climbed 14% to $2.36 billion, driven by antiviral products, such as Atripla (up 9% to $865.4 million), Truvada (up 8% to $804.2 million), Viread (up 11% to $214.9 million) and Letairis (up 33% to $105.1 million). Products sales were also aided by the launch of Complera/Eviplera last year. Stribild, a HIV combination pill, launched in the US in August 2012, contributed $17.5 million to total revenues in the third quarter of 2012.

Antiviral product sales for the quarter grew 13% to $2.04 billion. The US market contributed $1.17 billion (up 19%) to antiviral product sales, while Europe contributed $710 million (up 5%). Other products including Cayston and AmBisome liposome recorded sales of $122 million (up 10.6%).

Gilead’s royalty, contract and other revenues climbed 23% to $68.6 million. The increase was primarily attributable to higher royalty revenue from GlaxoSmithKline (GSK - Analyst Report) on Volibris.

On the operational front (excluding special items but including stock option expense), operating margin declined to 46.3% from 48.5% a year ago due to higher costs. Both research & development (R&D) expenses (up 41.4% to $406.79 million) and selling, general and administrative (SG&A) expenses (up 8.8% to $316.57 million) were on the upswing during the quarter. The rise in R&D expenses was primarily driven by Gilead’s efforts to develop its pipeline, whereas SG&A expenses increased primarily due to Gilead’s efforts to expand along with an increase in the US pharmaceutical excise tax.

Interest expenses jumped 107.2% to $89.3 million during the quarter. The massive increase was attributable to Gilead’s acquisition of Pharmasset earlier this year.

Encouraged by the strong third quarter 2012 results, Gilead increased its 2012 guidance for  product sales. Product sales are now expected in the range of $9.1-$9.2 billion (old guidance: $8.8-$9 billion).

Our Recommendation

We currently have a Neutral recommendation on Gilead. The stock carries a Zacks #2 Rank (Buy rating) in the short run.

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