Gilead Sciences (NASDAQ:GILD) broke a nice streak of better-than-expected earnings with an earnings miss in the third quarter of 2014. The pressure is now on for the biotech to resume its winning ways.
There are many details investors will focus on when Gilead announces its fourth-quarter financial results on Tuesday, Feb. 3. Few factors, though, will be as important as these three.
1. Impact of pricing wars
Gilead's back-and-forth hepatitis C pricing battle with rival AbbVie has generated plenty of headlines lately. Those skirmishes won't impact Gilead's fourth-quarter results. However, how the biotech foresees 2015 playing out as a result of the pricing battle could be a different story.
AbbVie struck first in December with a major exclusivity deal with the largest U.S. pharmacy benefits manager, Express Scripts. However, Gilead has been on a roll since then, lining up its own arrangements with Aetna, CVS Health, and others.
So far, no one really knows exactly what toll the price wars will take on overall revenue for Gilead's Harvoni and Sovaldi or for AbbVie's Viekira Pak. It all depends on how steep the companies discounted their hep-C drugs. Gilead's guidance could tell the story.
2. Inventory build for Harvoni and Sovaldi
Industry observers comb through weekly prescription data from IMS and Symphony Health like fortune-tellers read tea leaves. Predictions about Gilead's fortunes are heavily dependent on a major unknown variable: how much buyers are stocking up inventory.
It's pretty simple. If pharmaceutical distributors built inventory at levels equal to or greater than analysts think, Gilead has a good chance of beating earnings estimates. Lower inventory build levels, though, could mean a second consecutive earnings miss for the biotech.
Remember that we're talking about what buyers did from October through December and not what they might be doing now. It's quite possible that inventory build could be on the low end as distributors awaited FDA approval for AbbVie's hepatitis C drug.
3. That other multibillion-dollar franchise
While Gilead's hepatitis C drugs get all the buzz, investors shouldn't forget the biotech's other "little" franchise. HIV/AIDS drugs Atripla, Truvada, Complera/Eviplera, Stribild, and Viread generated $2.75 billion sales in third quarter alone.
Gilead's HIV/AIDS franchise could make the difference in how well the company performed overall last quarter. It's not far-fetched at all to envision a scenario where slightly disappointing results for Sovaldi and Harvoni are outweighed by strong growth from these other drugs. On the other hand, any hiccups with the franchise that has been Gilead's mainstay in years past could undercut positive surprises for the company's hep-C drugs.
Probably the most likely scenario is something of a repeat from last quarter. Atripla could experience a small year-over-year decline in sales with Truvada potentially edging it out. Meanwhile, Gilead's other HIV drugs should see strong growth.
Nickels, quarters, and dollars
Gilead's long term potential still appears to be quite positive. Even with competition from AbbVie, Gilead's hepatitis C drugs should continue to add billions of dollars to the company's top line, with much of it flowing to the bottom line also.
The best advice for investors is to not give undue priority to the results from one quarter -- whether those results are better or worse than expected. Sure, Gilead's shares might gain or lose a few percentage points based on the market's immediate reaction. Look at it this way, though: Nickels might be won or lost on the earnings figures from one quarter, but dollars are made by focusing on the long term.
Keith Speights owns shares of Express Scripts and Gilead Sciences. The companies might not get along with each other in the real world, but they live in perfect harmony in his investment portfolio. The Motley Fool recommends CVS Health, Express Scripts, and Gilead Sciences. The Motley Fool owns shares of Express Scripts and Gilead Sciences. 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.