Three months ago, there was plenty of anxiety among investors about how well Gilead Sciences (NASDAQ:GILD) performed during second quarter. Gilead's earnings announcement put all of those concerns to rest with stellar performance from its hepatitis C franchise. The biotech is set to release its third-quarter results on October 26.
How will Gilead fare this time around? The answer to that question could depend largely on the answers to the following three questions.
1. How strong were European sales?
The European market played a key role in Gilead's second-quarter success. European revenue jumped 50% year over year to $2 billion. That wasn't nearly as large as U.S. sales, but it was still significant.
Over half of Gilead's revenue in Europe during the second quarter stemmed from hepatitis C drugs Harvoni and Sovaldi. HIV drugs, particularly Eviplera and Stribild, kicked in most of the remaining European revenue.
The third quarter holds the potential for more good news. Sovaldi reimbursement should have expanded in the U.K. over the summer. Many European patients with hep C remain undiagnosed and represent a big opportunity for Gilead.
On the other hand, there's a real risk that the success experienced by Sovaldi and Harvoni could be too much too soon. Many European countries have budget ceilings that hold a cap on how much can be spent on new hep C drugs. It's possible that some of those budget ceilings could be reached in third quarter.
2. Have U.S. payers eased up on restrictions for Harvoni and Sovaldi?
An important question for Gilead in the U.S. relates to payer attitudes about reimbursement for the biotech's expensive hep C drugs, particularly as the pricing of many expensive pharmaceutical drugs is widely being called into question. In the second quarter, there were many more prescriptions written for Harvoni and Sovaldi than there were filled prescriptions. That translates to payer resistance.
A related factor is that Gilead faces competition in the hep C market from AbbVie's (NYSE:ABBV) Viekira Pak. AbbVie managed to win some exclusive deals that effectively locked Gilead out for some patients. However, turned out not to be a huge issue -- Gilead estimates that Harvoni is accessible to roughly 83% of all covered lives in the U.S.
A recent report from Advera Health Analytics could give a boost to Gilead in its battle with AbbVie. Advera examined side effects data for Viekira Pak, Harvoni, and Sovaldi. It found that Viekira Pak was most likely to trigger side effects. Harvoni caused the fewest side effects of the three drugs.
Gilead thinks that shortening treatment durations, particularly for Harvoni, could convince U.S. payers to ease up on reimbursement restrictions. The company is also encouraged by third-party reports that appear to bolster its claim that the investment in its high-dollar hep C drugs pays off. Then there's patient advocacy for access to effective hepatitis C treatments. Gilead's third-quarter results should signal whether any significant movement in payer attitudes has been achieved.
3. Were there big shifts in payer mix?
Another important question related to reimbursement pertains to payer mix for Harvoni and Sovaldi. Commercial payers tend to pay more than government programs. If the mix shifts in a meaningful way to higher volumes paid by federal and state governments, it could mean disappointing news for Gilead's third-quarter revenue and earnings.
Gilead knows that there will be a shift to higher Medicaid volumes in the second half of 2015. However, the company thinks that shift will be fairly small. If it's wrong, the third quarter might not be too great.
There's mixed news with respect to the federal Veterans Administration program. As of the second quarter, the VA didn't have funds to buy Gilead's hep C drugs. Gilead doesn't expect that to change until the fourth quarter. The good news is that the VA won't be a factor in reshaping the payer mix for Harvoni and Sovaldi. The bad news is that the VA won't be a factor at all -- at least for the third quarter.
Gilead upped its full-year revenue guidance three months ago but left full-year earnings guidance unchanged. That signaled the company's expectations for stronger sales that don't entirely flow down to the bottom line -- something that could occur if the payer mix shifts to higher government pay.
Wall Street expects third-quarter revenue of $7.81 billion and earnings of $2.86 per share. Gilead has done a good job of beating expectations so far in 2015. Strong results from Europe combined with easing payer restrictions and a minimal payer mix shift could mean the big biotech achieves a repeat performance.