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Gilead Sciences, Inc.’s (GILD - Free Report) reported results for the second quarter wherein both earnings and revenues surpassed expectations.

Second-quarter 2017 earnings (including the impact of stock-based compensation expenses) of $2.51 per share beat the Zacks Consensus Estimate of $2.11. However, earnings were below the year-ago quarter figure of $3.03.

Moreover, total revenue in the reported quarter was $7.1 billion and topped the Zacks Consensus Estimate of $6.4 billion. However, revenues declined 8.2% year over year.

 

Shares were up 1.8% in after-market hours trading following the release of second-quarter results. However, shares of Gilead have underperformed the Zacks classified industry in the year so far with the stock gaining 3.6% during this period, compared with the industry’s gain of 11.5%.

HIV Impresses Yet Again

Product sales came in at $7.0 billion, down 9% year over year. The decline was due to lower hepatitis C virus (HCV) sales, partially offset by higher sales across HIV and other therapeutic areas.

Antiviral product sales, which include Gilead's HIV and liver disease portfolios, came in at $6.4 billion in the reported quarter, down 9.8%.

HCV product sales, which include Harvoni, Sovaldi and the recently launched Epclusa, were $2.9 billion, down from $4.0 billion reported in the year-ago quarter. The downside was mainly attributed to lower sales of Harvoni and Sovaldi across all major markets, partially offset by sales of Epclusa (launched in 2016) across various locations.

Sales of Harvoni declined 46.1% year over year to $1.4 billion in the reported quarter. The decline was mainly due to lower sales in the U.S and Europe. Further, Sovaldi sales recorded a steep year-over-year decline of 76.8% to $315 million.

Epclusa garnered sales of $1.2 billion in the reported quarter, lower than the prior-quarter figure of $892 million. We note that Epclusa was launched in the U.S. and Europe in June and Jul 2016, respectively.

Meanwhile, HIV and HBV product sales came in at $3.6 billion, up 16.1% year over year. The increase was primarily driven by continuous strong uptake of tenofoviral afenamide (TAF)-based products such as Genvoya, which generated sales of $857 million, up from $302 million in the year-ago quarter, Descovy, which recorded sales of $286 million, up from $61 million, and Odefsey, which registered sales of $258 million, up from $58 million. HIV treatments like Stribild and Complera/Eviplera sales declined. Viread sales were up at $300 million, up 4.5%. Atripla sales tanked 29.4% to $475 million, while Truvada sales fell 13.8% to $812 million.

Other products like Letairis, Ranexa, AmBisome and Zydelig recorded sales of $230 million (up 13.3%), $200 million (up 30.7%), $92 million (up 8.2%) and $35 million (down 14.6%), respectively.

Research & development (R&D) expenses declined 41.8% to $864 million due to purchase of Nimbus Apollo, Inc. and a U.S. Food and Drug Administration (FDA) priority review voucher. On the other hand, selling, general and administrative (SG&A) expenses were roughly flat at $897 million. Adjusted product gross margin was 87.3%, up from 91.5% in the year-ago period.

2017 Guidance Updated

Based on a better-than-expected performance in the first half of 2017 specifically in the U.S, Gilead raised its guidance for 2017. Gilead now expects net product sales in the range of $24.0–$25.5 billion, up from $22.5–$24.5 billion provided earlier. Non-HCV product sales are projected between $15.5 and $16.0 billion (earlier projection: $15 and $15.5 billion). HCV product sales are projected between $8.5 and $9.5 billion (earlier projection: $7.5 and $9.0 billion). Adjusted R&D expenses and adjusted SG&A expenses are now projected in the range of $3.2–$3.4 billion and $3.2–$3.4 billion, respectively. Adjusted product gross margin is expected in the range of 86–88%. Earnings per share are now projected around 86 – 93 cents (earlier projection: 84 – 91 cents).

Dividend and Share Repurchase

Concurrently, Gilead declared a cash dividend of 52 cents per share of common stock for third-quarter 2017. The dividend is payable on Sep 28 to stockholders of record at the close of business on Sep 15. During the second quarter, the company paid cash dividends of $680 million and repurchased 2 million shares for $130 million.

Gilead Sciences, Inc. Price and EPS Surprise

 

Gilead Sciences, Inc. Price and EPS Surprise | Gilead Sciences, Inc. Quote

Our Take

The better-than-expected performance in the second quarter was driven by positive trends in the non-HCV business and better-than-expected results from HCV business (market share of 80%), particularly in the U.S due to rapid uptake of Epclusa. The HCV franchise was boosted by the FDA approval of Vosevi. HCV patient starts in the first six months were better than the company’s expectation. The company, however, expects a gradual decline in the second half of the year (market starts of 185,000 to 200,000 in the U.S) for 2017 due to increased competition. We note that Harvoni, Sovaldi and Epclusa, face competition from AbbVie’s, Inc. (ABBV - Free Report) Viekira Pak and Viekira XR and Bristol-Myers Squibb Company (BMY - Free Report) Daklinza among others.

Meanwhile, the HIV franchise maintains momentum driven by the rapid adoption of TAF-based regimens in the U.S. and EU. The TAF-based regimens now represent 51% of total Gilead HIV prescription volume following the launch of Genvoya and the launches of Odefsey and Descovy in 2016. Genvoya is now the company’s bestselling HIV product with a treatment-naïve patient share of 41%.

Strong uptake for Truvada for use in the pre-exposure prophylaxis setting is alsoexpected toboost sales as the company saw a significant uptick in PrEP usage in 2017 with an estimated 136,000 patients using Truvada by the end of the second quarter. However, Gilead will lose exclusivity for Viread in 2017 in some countries outside the U.S. which may impact sales.

Zacks Rank & Key Pick

Gilead currently carries a Zacks Rank #3 (Hold).   A better-ranked stock in the healthcare sector is Exelixis, Inc. (EXEL - Free Report) which currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Exelixis has delivered positive earnings surprises in the trailing four quarters with an average beat of 512.11%. Exelixis’s shares have soared 87.9% so far this year.

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