Gilead Sciences (NASDAQ:GILD) had an amazing fourth quarter, with sales up 137% year over year. The company is throwing off so much cash that it's starting a new $15 billion buyback and offering a new dividend.
Despite the solid performance and management's confidence in the cash flow, shares are down after hours.
Part of it could be management's guidance for product sales in 2015 of between $26 billion and $27 billion. That's only 6.2% to 10.3% higher than 2014, but since investors know Gilead's management is notoriously conservative with guidance, it probably isn't the major factor in the decline.
The biggest worry is probably about the pricing of Gilead's hepatitis C drugs, Harvoni and Sovaldi. The gross to net discount was about 22% at the end of 2014, but it's expected to jump to around 46% at the end of this year. The price war with AbbVie (NYSE:ABBV), which got its hepatitis C drug Viekira Pak approved late last year, is clearly pushing down prices. Insurers and pharmacy benefit managers aren't paying anywhere near the list price.
The lower price that Gilead has to give private insurance plans and pharmacy benefit managers is a double whammy for the biotech, because many public plans get mandatory discounts on top of the discount given to private companies, with some public U.S. healthcare systems paying less than half of the list price. As the number of patients on public plans taking Harvoni and Sovaldi increases, the average gross to net discount is adversely affected.
While a price war isn't good for Gilead, the discounts allow the company to retain access to those patients rather than be shut out by exclusive deals AbbVie negotiates. Gilead's management estimates that 60% of covered lives have been negotiated, and 80% of those have access to Harvoni.
Providing the discounts also allowed Gilead to ask for something in return: increased access to patients earlier in disease progression. Insurers had been limiting treatment to just the sickest hepatitis C patients, but the new price point affords insurers the opportunity to offer Sovaldi and Harvoni to patients who aren't as sick. Gilead estimates that 172,000 hepatitis C patients in the U.S. and EU have been treated since Sovaldi launched a little over a year ago. Expect that number to increase substantially this year, making up for some of the lower gross margin.
Fortunately, unlike the old joke about people losing money but trying to make up for it in volume, Gilead is quite profitable, throwing off $12.8 billion in operating cash flow last year. Rather than allowing the cash to pile up, the company is repurchasing shares and offering a dividend. Last year, Gilead bought back $5.3 billion worth of its stock, leaving $3 billion left on its last repurchase plan in addition to the $15 billion on the new plan.
A smaller amount of the cash will go to the dividend, which has a token 1.6% dividend yield. The dividend will end up costing Gilead about $2.6 billion each year at the current level, perhaps a little less if the company continues buying back shares.
The share repurchase allows Gilead the flexibility to make a purchase to boost its pipeline or even acquire already-approved drugs, but the sheer size of the authorization tells you that the company thinks its stock is cheaper than a lot of the opportunities out there.