GILD Gilead Sciences Inc

Gilead Sciences Inc. (GILD) reported earnings per share of 82 cents for the first quarter of 2011, 10 cents below the Zacks Consensus Estimate of 92 cents and 13 cents below the year-earlier earnings. The disappointing earnings performance was due to a weak top-line performance.

First quarter revenues decreased 8% from the prior-year quarter to $1.93 billion. Total revenues were also much below the Zacks Consensus Estimate of $2.05 billion. Revenue performance was disappointing due to a weak performance of the antiviral (HIV) franchise and lower royalties from Roche (RHHBY) on Tamiflu sales.

The First Quarter in Detail

Product sales, at $1.86 billion, though up 4% over the prior year, were down 3% sequentially. The sequential decline in sales was due to weak performance of antiviral products like Atripla, Truvada and Viread in US.

Antiviral product sales for the quarter though up 2% year over year to $1.63 billion were down 4% sequentially. The sequential drop was due to declines in wholesaler inventories in the US and purchase cutbacks by certain state funded AIDS Drug Assistance Program (ADAP) entities in Florida and Texas.

Among the antiviral products, Viread delivered the worst performance recording sales of $168.4 million, down 7% over the prior year and 12% on a sequential basis, being affected by decreased sales volume in Brazil. Atripla sales though up 7% over the prior year to $744.5 million were down 4% sequentially. Truvada sales were also down 1.3% sequentially to $673.1 million despite being up 2% over the prior year.

Other products such as Letairis (for the treatment of pulmonary arterial hypertension) and Ranexa (for chronic angina) recorded sales of $62.2 million (up 12% over the prior year) and $68.3 million (up 33%), respectively, thanks to volume growth.

Gilead’s royalty, contract and other revenues plummeted 79% to $62.5 million based on lower royalties from Roche on Tamiflu sales. Tamiflu-related royalties during the quarter were $11.1 million as opposed to $246.3 million in the year-ago period. Demand for Tamiflu has declined significantly from 2009 levels due to the waning of the swine flu.

Guidance Reiterated

Despite the first quarter miss, Gilead maintained its previously provided guidance for 2011. The company expects product revenue in the range of $7.9 billion to $8.1 billion in 2011, reflecting an increase of 7% to 10% over 2010 product sales. The Zacks Consensus sales estimate for 2011 is $8.36 billion. The guidance assumes that the state ADAP purchasing will resume.

R&D expenses are forecast in a $950 million to $1 billion band and SG&A expenses are expected in a range of $1 billion to $1.05 billion. The effective tax rate is expected in the range of 25% - 27%.

Product and Pipeline Update

Gilead has re-filed its new drug application (NDA) to the US Food and Drug Administration (FDA) for its once daily, single tablet, fixed dose combination of Truvada and TMC278 (rilpivirine) as a HIV treatment for adult patients. Earlier, in January this year, the FDA had issued a refuse-to-file notice for the NDA. The FDA has assigned a priority review status to the application and will give its decision on August 10, 2011. We believe the combo pill is key to long-term growth at Gilead.

In March this year, Gilead announced that its key HIV pipeline candidate elvitegravir met the primary endpoint in a late-stage trial. Elvitegravir was shown to be non-inferior to Merck’s (MRK) Isentress at week 48 in viral load reduction. Gilead hopes to use the 48-week data from the elvitegravir study for regulatory filings for both elvitegravir and the Quad pill. The latter is a fixed dose combination of four Gilead drugs, elvitegravir, cobicistat, and Truvada (made up of Emtriva and Viread). The Quad pill is also being studied for the treatment of HIV.

Data from phase III trials of the Quad pill are expected to be presented in the third quarter of 2011, which we believe will be one of the most significant events for the company this year. The NDA for Quad is expected to be filed in the first quarter of 2012 and that of elvitegravir and cobicistat (being developed as a booster for protease inhibitors in the treatment of HIV in late stage trials) are expected during the second quarter of 2012.

Gilead announced that a late stage trial studying Cayston in cystic fibrosis with Burkholderia cepacia infection failed to show any benefit in this population. Gilead plans to begin two late stage studies in patients with bronchiectasis by mid 2011.

In March this year, Gilead announced that the FDA has approved the removal of potential liver injury warning from the boxed caveat of the Letairis label. In conjunction with the label change, patients receiving Letairis will no longer require monthly monitoring of liver function through blood tests. We believe the label change would be a definite positive for the uptake of the drug and lend it a competitive edge over other PAH drugs. In the same month, Gilead entered into a research collaboration with Yale School of Medicine for discovery of novel cancer therapies.

The MicroDose Collaboration

In addition to presenting financial results, Gilead announced that it has entered into a license and collaboration agreement with MicroDose Therapeutx Inc. for the development and commercialization of MDT-637, MicroDose's antiviral fusion inhibitor for the treatment of respiratory syncytial virus (RSV).

Gileadwill support the development of the candidate through phase IIa, following which it has the option to take on full clinical development of the product. Gilead will make an undisclosed upfront payment and provide research funding. MicroDose is also eligible to receive milestone payments, development fees and royalties on net sales, if the drug is marketed. An Investigational New Drug (IND) for the candidate will be filed by MicroDose soon with an aim to begin phase I trials this year.

Our Recommendation

Currently, we have a Neutral recommendation on Gilead, which is supported by a Zacks #3 Rank (short term hold). Despite the disappointing performance this quarter, we remain optimistic on the growth potential of Gilead’s HIV franchise drugs, Truvada and Atripla. The fundamentals of the HIV franchise are strong as demonstrated by patient demand and prescription growth in the first quarter despite the declines. The ADAP fluctuation seems temporary. We are also encouraged by Gilead’s strong HIV pipeline. However, the company’s HIV drugs are facing patent challenges from generic companies. Gilead’s revenues also continue to be unfavorably impacted by pricing pressures in Europe and currency fluctuation.

 
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