Should You Buy Stock in Gilead After the Earnings Miss?

Gilead Sciences (NASDAQ: GILD  ) reported a relatively rare earnings miss in the first quarter on May 2. The biotech announced earnings of $0.48 per share while analysts were expecting $0.50 per share. Should investors buy stock in Gilead anyway, or was there more to this miss?

Time of transition
Examination of Gilead's sales numbers shows why earnings weren't at expected levels. Two of the company's top-selling drugs experienced revenue declines during the quarter. Sales for Atripla, which is the world's best-selling HIV drug, fell 1% year-over-year during the first quarter to $877 million. Sales for Truvada dropped 8% compared to the same period in 2012, coming in at $700 million.

Gilead really isn't worried about these declines. I don't think investors should be, either. 

Keep in mind that Atripla was first introduced in 2006. That's quite a while back considering the quick pace of changes in HIV drug development. The drug is a combination of Gilead's Truvada and Bristol-Myers Squibb's (NYSE: BMY  ) Sustiva. Both companies anticipated that sales could weaken as Sustiva faces possible generic rivals in Europe and Canada this year and in the U.S. next year. With this recognition and the introduction of newer products by Gilead, the two companies discontinued joint coordination of marketing efforts in 2011.

The decrease in Truvada sales stems from a couple of factors. First, Gilead noted in the fourth quarter that there were significant sales volumes -- to the tune of $80 million to $100 million -- that were purchased ahead of demand. The company said after the most-recent earnings release that Truvada was especially affected by this.

Second, patients are shifting from Truvada to newer regimens Complera and Stribild. Gilead expects patients will switch from both Atripla and Truvada to the new treatments, but the transition from Truvada will likely be at a faster rate.

Continued strength
Gilead's stock has more than doubled in the past year and is up more than 40% so far in 2013. I think it's still a good buy.

The company should continue to be a dominant force in the HIV drug market. AbbVie (NYSE: ABBV  ) continues to lose market share with Kaletra. Gilead could face a serious challenge, though, from ViiV Healthcare, a joint collaboration between GlaxoSmithKline (NYSE: GSK  ) , Pfizer (NYSE: PFE  ) , and Japanese drugmaker Shionogi. 

ViiV competes against Gilead with Combivir, but the drug went off patent in the U.S. last year.However, the FDA granted priority review status to ViiV's integrase inhibitor dolutegravir in February. Clinical studies found that dolutegravir combined with another ViiV drug performed better than Atripla. 

Dolutegravir could launch by the fourth quarter of this year. It might impact sales of Stribild, but I still think Gilead will do well. One reason behind this thinking is that Gilead split profits with Bristol-Myers on Atripla but won't have to with Stribild since the components of the combo drug are all owned by Gilead.

The hepatitis C market presents a significant opportunity for Gilead's growth. AbbVie seemed to be in the lead for the market last fall after the release of study results showing that its four-drug regimen achieved a 99% cure rate for hep C patients after 12 weeks. That lead didn't last very long, though.

A couple of weeks ago, Gilead struck back with its own study results. These results found patients in one arm of the study were completely cleared of hep C after only eight weeks of taking the company's drug combo. Even better, Gilead's regimen included three drugs at most compared to AbbVie's four-drug combo.

Should investors buy stock in Gilead after the $0.48 per share versus $0.50 per share earnings miss? Here's my two cents: Yes.

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