Gilead Sciences (GILD +1.27%) presented at the Morgan Stanley Healthcare Conference last week. Rather than the standard presentation of a slide deck, the conference is more of a Q&A, which produces off-the-cuff responses that can be more enlightening for investors than the rehearsed sound bites you often hear at conferences.
Here are five quotes from John Milligan, president and COO of Gilead, from the conference:
John Milligan. Source: Gilead Sciences.
-
"If you think about the overall HCV market in the United States, there's, from a patient perspective, somewhere between 3 million and 4 million -- I think it's closer to 4 million patients -- who have HCV. Through the first half of this year we've treated 70,000, and that's been a pretty significant increase in the run rate versus last year."
Do the math. At the current rate, it'll take 20 years or more to work through all of the patients infected with the hepatitis C virus, or HCV. There was a bump in sales between the first and second quarters, so the run rate will probably be a little more than 140,000 per year, but it's pretty clear the limiting factor in the near term will be the number of slots for doctors appointments, not the number of patients. For the long term, the key is how accurate the estimate of 3 million-4 million patients is since many of them are undiagnosed.
-
"There are 140 million people who have HCV around the world, and our current manufacturing capacity could not ever accommodate all those patients. And so, we need the scale that they have in order to achieve this. So it's a very similar strategy, we will get a small royalty in return."
Now, that's a lot of patients. Of course most of them can't afford the $80,000-plus price tag for the drug, so Gilead's strategy is to license the rights to its hepatitis C drugs in emerging markets, collecting a small royalty.
And I do mean small.
-
"When I think about the next generation of products, I think the price per patient is probably similar to the current price of a regiment."
Gilead should gain FDA approval shortly for its all-oral HPV treatment that combines Sovaldi with another drug. While the statement makes it sound like there won't be a price increase, that's not really the case. Currently, many people infected with HPV have to take Sovaldi and either Merck's (MRK 0.48%) Pegintron or Roche's Pegasys. The plan seems to be to price the Sovaldi combination at the current price of Sovaldi plus the price of the companion drug.
-
"As you know, we have an ongoing share buyback program from a previously authorized share buyback program, which will expire the end of this quarter. As that expires, the board has authorized another $5 billion worth of share buyback, which will occur over the next 3 years -- up to the next 3 years, depending on how aggressive we are in the market. And that's up to our CFO, and she will determine the aggressiveness of that, as we go through that program. So that is our immediate-term capital allocation."
With Sovaldi an instant megablockbuster, Gilead is swimming in cash. Beyond the increased earnings from increased revenue, the buybacks help increase earnings per share, which helps drive up the stock price.
Conspicuously absent from Milligan's answer about capital allocation: any mention of a potential dividend. While that might be an option down the line, I think it's likely Gilead avoids giving a dividend in the near future because cash flow is dependent on Sovaldi, which will dry up at some point.
-
"If you try to chase [R&D spending] as a percentage [of revenue], you make bad choices and you hire too many people, and you end up with some of the situations you see today, with then having to lay off people. And I don't want to ever have to do that. So, I want to maintain a really thoughtful growth pattern around R&D."
Buybacks can only go so far, Gilead has to set itself up for revenue growth beyond Sovaldi. But as Milligan points out, it's a tough problem that can go terribly wrong if the company isn't smart about growing its pipeline. Investors should examine closely the drugs Gilead in-licenses over the coming years; moving beyond HIV and hepatitis C is key to success.
