Gilead Beats on Earnings & Revs, Sovaldi off to a Flier

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Gilead Sciences, Inc. (GILD) exited 2013 on a strong note with fourth quarter earnings (including stock-based compensation expenses but excluding other special items) coming in at 52 cents per share, above the Zacks Consensus Estimate of 49 cents and up 8.3% year over year. Revenues increased 21% y/y to $3.1 billion, above the Zacks Consensus Estimate of $2.9 billion.

Despite the negative impact of currency fluctuation, Gilead recorded growth on the back of strong product sales. The antiviral franchise continued its strong performance in the final quarter of 2013. Gilead’s potential blockbuster hepatitis C virus (:HCV) infection treatment Sovaldi, approved by the U.S. Food and Drug Administration (:FDA) in Dec 2013, is off to a strong start.

Including one-time items, fourth quarter earnings remained flat at 47 cents per share.

Full year 2013 revenues increased 15% to $11.2 billion, topping the Zacks Consensus Estimate of $10.9 billion. Earnings (including stock-based compensation expenses but excluding other special items) increased 11.6% to $1.93 per share, above the Zacks Consensus Estimate of $1.91 per share.

The Fourth Quarter in Details

Product sales climbed 21% to $3.04 billion, driven by anti-viral products, such as Viread (up 18% to $266.9 million), Complera/Eviplera launched in 2011 (up 122% to $261.8 million), and Atripla (up 2% to $933.6 million). Stribild – an HIV combination pill – launched in the U.S. and the EU in Aug 2012 and May 2013 respectively, contributed $203.7 million to total revenue in the fourth quarter of 2013, up 41.6% sequentially driven by strong demand. Sovaldi made a strong debut and recorded U.S. sales of $136.4 million in its first few days in the market.

Antiviral product sales for the quarter grew 22% to $2.64 billion. The U.S. market contributed $1.64 billion (up 30%) to antiviral product sales, while Europe contributed $795 million (up 7%). Other products including Letairis, Ranexa and AmBisome recorded sales of $138.5 million (up 19%), $129.9 million (up 31%) and $93.6 million (up 3.1%), respectively. Gilead’s royalty, contract and other revenues fell marginally to $76.6 million.

On the operational front (including stock-based compensation expenses but excluding other special items), operating margin declined to 41.3% from 43.7% a year ago. Research & development (R&D) expenses climbed 24.6% to $540.9 million in the fourth quarter of 2013 while selling, general and administrative (SG&A) expenses surged 41.1% to $512.9 million. The rise in R&D expenses was primarily driven by Gilead’s efforts to develop its pipeline. The increase in SG&A expenses was primarily attributable to Gilead’s efforts to expand. Costs associated with the marketing of Sovaldi also pushed up SG&A expenses.

Interest expenses declined during the fourth quarter of 2013 to $73.2 million from $85.9 million a year ago due to debt repayment.

2014 Projection

Gilead expects product sales in the range of $11.3–$11.5 billion, well above the $10.8 billion recorded in 2013. However, we expect Gilead to record much higher product sales in 2014 as the company’s guidance excludes Sovaldi sales.

Adjusted product gross margin for 2014 is projected in the range of 75%–77%. R&D expenses (excluding stock based compensation expenses and other special items) are projected in the range of $2.2–$2.3 billion, well over 2013 levels.  The increase reflects Gilead’s efforts to develop its pipeline. SG&A expenses are projected in the range of $2.1–$2.2 billion, well above the 2013 figure. The increased projection is reflective of Gilead’s efforts to market Sovaldi effectively. Costs associated with the anticipated launch of idelalisib were also responsible for the higher SG&A forecast.

Our Take

We are pleased by the strong sales of Gilead’s key products in the final quarter of 2013. However, this does not surprise us given the biopharmaceutical company’s impressive product portfolio. Sovaldi’s initial sales also encourage us.

We expect 2014 to be a very strong year for Gilead. All eyes will be on Sovaldi’s performance. Sovaldi, with its high cure rates, a short treatment period and reduction/elimination of the need for interferon injections, has the potential to change the treatment paradigm in the HCV space. We are a tad disappointed by the company’s decision not to give guidance on 2014 Sovaldi sales. Apart from Sovaldi, focus will also be on Gilead’s pipeline, particularly idelalisib.

Gilead carries a Zacks Rank #3 (Hold). Better-ranked stocks in the biopharma space include Actelion Ltd. (ALIOF), Alexion Pharmaceuticals, Inc. (ALXN) and Alnylam Pharmaceuticals, Inc. (ALNY). While Actelion and Alexion carry a Zacks Rank #1 (Strong Buy), Alnylam holds a Zacks Rank #2 (Buy).

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