What We Learned from Gilead Sciences' First Quarter Earnings

Gilead Sciences crushed consensus in its first quarter earnings. Does it matter?

Apr 23, 2014 at 8:53AM

After a long quarter chocked full of negative headlines that sent shares of Gilead Sciences (NASDAQ:GILD) spiraling downwards, we finally got to see the company's long-awaited first quarter earnings yesterday. And they certainly didn't disappoint. Gilead crushed consensus estimates by around 40%, posting Non-GAAP earnings per share of $1.48. This astonishing beat was driven primarily by sales of Gilead's spotlight hepatitis C drug, which came in at around $2.3 billion for the quarter, with $2.1 billion coming from U.S. sales.

What's particularly noteworthy is that this is one of the strongest launches of any drug in history and one of the best quarters sales-wise for any pharmaceutical product as well.

And oddly enough, this record breaking launch may still not be enough to sate the bears going forward. As I mentioned prior to this earnings release, the market was clearly looking for Gilead to reassure investors about Sovaldi's pricing moving forward and it wanted the company to increase 2014 guidance. Let's dig into the earnings call to see if the company met Mr. Market's demands.

Will Sovaldi's pricing change in the near-term?
A number of analysts on the call danced around this very question without asking it directly. Instead, they couched the question in terms of pressure from payers such as UnitedHealth Group (NYSE:UNH) and how clinicians are reacting to the drug. Basically, how is the tension between payers and clinicians playing out in the real world? Despite the meandering and convoluted nature of the question, the issue at hand remains the same. And Gilead's management took a rather interesting approach in answering it, while also providing some important ancillary tidbits.

In response to this issue, Gilead's CEO John Martin cited recent studies that unequivocally demonstrate that not treating chronic hepatitis C patients, with what amounts to a functional cure, is actually more costly in the long-run. Gilead's management also noted on the call that Sovaldi isn't priced much differently than the current standard of care, which is nowhere near as effective. Taken together, I think this is Gilead's roundabout way of  saying that you shouldn't expect a price change for Sovaldi anytime soon.

We also learned from this line of questioning that payers appear to be trying to restrict Sovaldi's use to the sickest patients, i.e., patients with the highest degree of liver fibrosis. Although UnitedHealth Group has suggested that patient volume may moderate after the first quarter, Gilead believes otherwise, citing the fact that only half the targeted physicians have yet to prescribe the drug, the VA and prison systems are only now coming online in terms of Sovaldi use, and the vast majority of prescriptions in the quarter came from patients with private insurance. That last bit is particularly interesting because many hepatitis C patients are believed to be on either Medicare or Medicaid, suggesting there are a large number of patients that are yet to be treated. In short, there was a lot of good info gleaned from this closely watched issue. 

What about 2014 guidance?
Despite Gilead posting $4.87 billion in product sales for the quarter, the company decided to reaffirm its low ball 2014 guidance of between $11.3 billion to $11.5 billion, excluding Sovaldi sales. Moreover, management didn't provide much color on why they are refusing to provide full year guidance for Sovaldi.

My guess is that the potential launch of AbbVie (NYSE:ABBV) and Enanta Pharmaceuticals' (NASDAQ:ENTA) competing product could be complicating this matter. With the two companies officially filing a New Drug Application for their combo therapy yesterday, we could see the drug on the market before year's end. Another possibility is that Gilead doesn't have a good handle on how its own all-oral therapy, that's currently under view, will affect sales going forward. That said, I suspect the biggest hurdle to predicting Sovaldi sales is the push-back from payers, who are trying to create a bottleneck to patient access to the drug. So, there are good reasons for Gilead to remain cautious with Sovaldi's full year sales projections.

Foolish wrap-up  
Gilead is now on track to grow year over year revenue by 60%, without any further growth in sales from its top products. Let that sink in if you will. Yet, Gilead shares moved upwards by less than 3% in after hours trading yesterday, post-earnings release. I can't help but think that this anemic move upwards, after such a blowout quarter, is due to the company not increasing guidance for the remainder of the year. That said, we should see Gilead accelerate its share buyback program using some of the cash generated from Sovaldi sales, which should help stabilize share price. In sum, Gilead's first quarter earnings are off the charts good, but uncertainty over the sustainability of Sovaldi's record breaking sales remains an open question. So, stay tuned!  

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George Budwell owns shares of Gilead Sciences. The Motley Fool recommends Gilead Sciences and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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