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Gilead Beats on Q3 Earnings, Sovaldi Sales Fall Sequentially

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Gilead Sciences, Inc.’s (GILD - Free Report) third-quarter earnings (including stock-based compensation expenses) of $1.79 per share surpassed the Zacks Consensus Estimate of $1.64. Moreover, reported earnings were way above the year-ago figure of 49 cents per share.



Including one-time items, the company reported third-quarter earnings of $1.67 per share, well above the year-ago figure of 47 cents.

Total revenues of $6.04 billion was no comparison to the year-ago figure of $2.78 billion. Quarterly revenues were above the Zacks Consensus Estimate of $5.89 billion. However, total revenues fell 7.5% on a sequential basis due to a slowdown in sales of the company’s blockbuster hepatitis C virus (HCV) drug, Sovaldi. We expect investors to react negatively to the news.

Quarter in Detail

Product sales more than doubled (120.3% growth) to approximately $5.97 billion driven by the inclusion of Sovaldi sales.

The company’s key growth driver, Sovaldi registered sales of $2.8 billion in the third quarter of 2014. However, Sovaldi sales declined 19.7% sequentially. On its third-quarter conference call, the company attributed the decline to physicians delaying the initiation of treatments in the U.S. in anticipation of Harvoni's approval. Harvoni is the first single-tablet regimen for patients suffering from genotype 1 HCV. It was cleared by the FDA on Oct 10.

Antiviral product sales for the quarter registered massive growth of 138% to $5.54 billion driven by Sovaldi. Other anti-viral products, such as HIV treatments Complera/Eviplera (up 57% to $330.3 million) and Stribild (up 128% to $328 million) performed very well. Sales of older HIV drugs like Truvada (up 8% to $875.5 million) and Viread (up 19% to $275.6 million) were also impressive. However, Atripla sales declined 1% to $894.8 million.

Other products including Letairis, Ranexa and AmBisome recorded sales of $146.4 million (up 8%), $132.5 million (up 14%) and $98.1 million (up 0.3%), respectively. Newly launched Zydelig also performed well, recording revenues of $5.86 million.

Research & development (R&D) expenses (including stock-based compensation expenses) climbed 21.4% to $626.6 million in the third quarter of 2014 due to increased investment in pipeline. Selling, general and administrative (SG&A) expenses (including stock-based compensation expenses) surged 130.5% to $944.5 million. SG&A expenses shot up primarily due to a non-tax deductible cumulative catch-up fee of $337 million associated with final regulations in the Affordable Care Act issued during the quarter. Costs associated with the marketing of Sovaldi and Zydelig also pushed up SG&A expenses.

2014 Guidance Revised

Gilead raised the low end of its net product sales guidance. The company expects net product sales in the range of $22 billion to $23 billion (previous guidance: $21–$23 billion).

Adjusted product gross margin for 2014 is now projected in the range of 86% to 88% (old guidance: 85% to 88%). The adjusted effective tax rate is now pegged in the range of $17.5% to 19.5% (previous guidance: $17.5% to $20.5%).

The company continues to expect R&D expenses in the range of $2.3 billion to $2.4 billion. SG&A expenses are now expected in the range of $2.7 billion to $2.8 billion as compared to the previous guidance of $2.3 billion to $2.4 billion. The increase is attributable to the impact of IRS regulations related to the change and accounting for the branded prescription drug fee.

Our Take

Although the company posted strong third-quarter results with both earnings and revenues beating our expectations, we are concerned about the slowdown in Sovaldi sales. The drug was well received in the HCV market. According to Gilead, approximately 117,000 patients have been treated with Sovaldi in the U.S. since its launch late last year.  

The sequential dip in Sovaldi sales is due to a warehousing effect as physicians and patients wait for Harvoni, an oral single tablet regimen for HCV. Harvoni is priced at $94,500 for a 12-week treatment. The price is comparable to the Sovaldi plus pegylated interferon and ribavirin regimen. In fact, it is estimated that half of the HCV genotype 1 patients may benefit from eight weeks of Harvoni treatment, which would reduce the cost by 33% for the patients. We note that several companies including AbbVie Inc. (ABBV - Free Report) and Merck (MRK - Free Report) are also looking to bring their next generation of HCV treatments to the market. Going forward, we expect investor focus to remain on the ramp up of Harvoni.

Gilead currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the health care space include Allergan Inc. (AGN - Free Report) and AbbVie. Both stocks hold a Zacks Rank #2 (Buy).

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