Gilead Sciences 2016 Guidance: Sandbagging Wall Street Again?

Image source: Flickr user stockmonkeys.com.

Gilead Sciences (GILD 0.91%) has a reputation for being cautious with its financial guidance, and last year was no exception.

In February 2015, CEO John Martin forecast that Gilead Sciences' sales would grow to between $26 billion and $27 billion, but the company ended up delivering revenue of $32.6 billion.

Now, management thinks Gilead Sciences' sales will slip to between $30 billion and $31 billion in 2016. Could this be yet another example of Gilead Sciences sandbagging Wall Street expectations? Read on to see why Gilead Sciences management is cautious and what could allow them to over-deliver again this year.

Protecting the moat
Similar to 2015, Gilead Sciences enters 2016 with a big target on its back. Last year, it was AbbVie's (ABBV 1.06%) hepatitis C drug Viekira Pak that was taking aim at Gilead Sciences' top-selling drug Harvoni, and this year, it's Merck & Co's (MRK 0.44%) Zepatier that's firing the shot.

Merck & Co hopes that it will have better luck at wrestling away market share from Harvoni in the ultra-lucrative hepatitis C market than AbbVie did. Despite AbbVie inking high-profile exclusivity deals that led to a price war, Viekira Pak's $2.2 billion in annualized fourth-quarter sales came up shy of projections for a $3 billion sales run-rate by the end of last year.

Zepatier would appear to have a better chance at making a dent in Gilead Sciences' HCV dominance because Zepatier is dosed once daily, can be used with or without ribavirin, and arguably matches up better in terms of efficacy and safety to Harvoni than Viekira Pak does.

Those advantages to Viekira Pak suggest Zepatier is a bigger threat to Gilead Sciences' top-selling HCV drug Harvoni, but the biggest risk to Harvoni's market share may be Zepatier's list price. While Harvoni boasts a jaw-dropping $94,500 price tag, Zepatier's list price is just $54,600.

Image source: Gilead Sciences

Not so fast
In theory, Zepatier would appear to have the right combination to deliver a knockout punch to Harvoni, but in reality, Zepatier's challenge may fall flat.

Unlike Harvoni, Zepatier is only approved for use in genotype 1 and genotype 4 hepatitis C patients and its prescribing label calls for pre-screening to see if patients have specific polymorphisms that could extend patient treatment to 16 weeks from 12 weeks.

In clinical trials, those polymorphisms were found in about 10% of genotype 1 patients, and in those cases, Zepatier's cure rate slips below 90%.

Zepatier also requires liver testing to make sure that liver enzymes don't spike in patients and because of that risk, Zepatier won't be used in patients with moderate to severe liver disease.

Additionally, while Zepatier's price looks like a bargain on the surface, it's actually not that different than Harvoni, which is often sold at a discount to its list price that brings its average cost per patient down closer to $50,000.

Zepatier may also struggle to against Harvoni because up to 45% of genotype 1 patients qualify for a shorter and lower-cost 8-week regimen of Harvoni that improves patient adherence. Zepatier is dosed for a minimum of 12 weeks in patients.

Additional hurdles
Gilead Sciences' tepid forecast is also being blamed on uncertain demand from domestic and international government payers.

Last year, insufficient funding at the Department of Veterans Affairs significantly limited patient starts and while new funding removes that overhang for now, it's not clear how VA funding will shake out later in the year.

Medicaid is also a big wild card because roadblocks put in place to limit the use of HCV therapies in Medicaid patients to cut costs remain in place.

In Europe, volume discount deals that could push average prices lower could also put a drag on results and, after enjoying a significant tailwind from Japan in 2015, mandated price cuts in that market could drive down revenue, too.

Looking forward
The challenges facing Gilead Sciences are real, but the company has an excellent track record of innovating best-in-class products that allow it to side-step risks. In fact, the company's R&D prowess may be the biggest reason why Gilead Sciences ends up over-delivering this year.

In mid-August, the FDA will weigh in on Gilead Sciences next-generation hepatitis C drug. If approved, that drug will be the first pan-genotype therapy on the market, and that's important because it could eliminate costly genotype testing. This new therapy's cure rates and safety in trials indicate that it, rather than Zepatier, is destined to become the standard of care in hepatitis C. If so, then it could command a smaller discount to list price than Harvoni and Sovaldi monotherapy, boosting revenue per patient and Gilead Sciences' top-line in the back-half of the year.