GILD Gilead Sciences Inc

Gilead Sciences Inc.’s (GILD) adjusted earnings per share of 97 cents for the third quarter of 2011 beat the Zacks Consensus Estimate by a penny. Earnings were also 11 cents above the year-earlier earnings of 86 cents. The earnings growth was driven by strong product sales in the reported quarter.

Third quarter revenues were up 9.4% from the prior-year quarter to $2.12 billion. Total revenues edged past the Zacks Consensus Estimate of $2.11 billion. Revenues were however below the second quarter 2011 revenue of $2.14 billion. Strong product sales were offset by a decline in royalty, contract and other revenues.

The Third Quarter in Detail

Product sales, at $2.07 billion, were up approximately 11% over the prior year due to a strong performance of antiviral products.

Antiviral product sales for the quarter were up 9% year over year to $1.79 billion driven by solid performance of Atripla and Truvada. Antiviral revenue in the US was $984.8 million in the relevant quarter, up 7% over the prior year, driven by demand growth.

In Europe, antiviral revenue was $677.1 million, up 10% year over year, also propelled by brisk demand. Revenues in Europe were however down sequentially due to the negative impact of foreign exchange.

Sales of Truvada, which is a fixed-dose, once-daily tablet containing Gilead's Viread and Emtriva, were up 11% to $744.7 million. Sales of Atripla, which combines Truvada and Bristol Myers Squibb’s (BMY) Sustiva, were up 7% over the prior year to $794.7 million. Higher sales of both the HIV products were egged on by volume expansion in the US and Europe.

Viread for the treatment of HIV and chronic hepatitis B recorded sales of $192.9 million, up 5% over the prior year as volume growth in US and Europe offset weak sales in Latin America.

In August 2011, Gilead received approval for Complera, a fixed-dose combination of Truvada and Johnson and Johnson’s (JNJ) new HIV drug Edurant. Complera recorded revenue of $19 million in the reported quarter. The drug is also expected to be approved in the EU, where it will be marketed as Eviplera, by the end of this year. In September, Eviplera received a positive recommendation from the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency.

The CHMP however limited the use of Eviplera only in patients with low viral load (below 100,000 HIV RNA copies/mL). We believe this positive opinion will expedite a European approval.

Other products such as Letairis (for the treatment of pulmonary arterial hypertension) and Ranexa (for chronic angina) recorded sales of $79.0 million (up 31% over the prior year) and $82.0 million (up 36%), respectively, also due to volume growth.  Letairis sales benefited from removal of potential liver injury warning from its label in the US.

Gilead’s royalty, contract and other revenues were down 23% to $55.8 million owing to lower royalties from Roche (RHHBY) on Tamiflu sales. Tamiflu-related royalties during the quarter were $3.7 million as opposed to $34.5 million in the year-ago period. Demand for Tamiflu has declined significantly from 2009/2010 levels due to the waning of the swine flu.

2011 Guidance

Gilead tightened its previously provided guidance for 2011. The company expects product revenue in the range of $8.0 billion to $8.1 billion in 2011, reflecting an increase of 8% to 10% over 2010 product sales (prior guidance:  $7.9 billion to $8.1 billion). The Zacks Consensus Estimate for 2011 sales is at present $8.35 billion.

Adjusted product gross margins are expected to range between 75% and 76%. Research and development expenses are guided in the range of $1.05 billion to $1.1 billion, up 10% from prior expectations due to new deals entered into in 2011 which have expanded the pipeline.  SG&A expenses are forecast in a band of $1.05 billion to $1.1 billion due to increased bad debt and legal expenses.

Pipeline Update

Gilead filed the new drug application (NDA) for approval of its investigational HIV combination pill, Quad, in late October 2011. The much anticipated Quad pill is a combination of Gilead’s pipeline candidate elvitegravir, cobicistat (GS 9350), and Truvada. In the third quarter of 2011, Gilead announced positive data from two late stage studies of Quad, study 102 and 103.

The NDA included data from both study 102 and 103. Gilead will request the FDA to grant priority review status to the NDA, which if granted is expected to lead to approval of Quad before mid 2012. We believe the positive outcomes of these studies will ensure the regulatory nod. On approval, Quad has the potential to reach blockbuster status and become a market leading HIV medicine, Quad together with Complera/Eviplera will further fortify the HIV franchise and help mitigate the impact of the upcoming patent expirations.

Our Recommendation

We currently have a Neutral recommendation on Gilead. The stock carries a Zacks #3 Rank (short-term Hold recommendation).

We are optimistic on the growth potential of Gilead’s HIV franchise drugs, Truvada and Atripla. We believe Complera/Eviplera together with Quad, once approved, has the potential to drive sustainability of the HIV franchise.

However, we are concerned about patent challenges to its key HIV drugs. We maintain a cautious stance until Complera along with the current pipeline proves its worth, compensating for lost revenues from patent lapses.

 
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