Gilead Sciences (NASDAQ:GILD) had a lot of exciting news to report to shareholders in their earnings call this week.

In this week’s Healthcare Industry Focus, Kristine Harjes, Todd Campbell, and Michael Douglass go over the numbers, and how they compare to last year. Also, they explain why Gilead gave such flat guidance after such a stellar year, a few exciting new drugs in the pipeline, one area they’re seeing a decline in market share (and what they’re doing about it), what’s going on with their CEO situation, and more.

A full transcript follows the video.

This podcast was recorded on Feb.3, 2016. 

Kristine Harjes: Grading Gilead on this healthcare edition of Industry Focus.

Hi, everyone! It is February 3rd, 2016. I'm Kristine Harjes, your Industry Focus: Healthcare host. I'm joined today, as usual, by contributor Todd Campbell. Hi, Todd!

Todd Campbell: Hi, how are you?

Harjes: Good. He's on Skype. We've also got in the recording studio with me Motley Fool healthcare analyst Michael Douglass. Hello, Michael!

Michael Douglass: Hi, Kristine. Great to be back.

Harjes: It's going to be a great discussion today. We're talking about Gilead Sciences, which is a personal favorite for all three of us. They reported earnings this morning. If you follow us on Twitter -- the handle, by the way, is @MFIndustryFocus -- then you already know I spent my morning commute Metro ride reading the call transcripts. This has been my entire day so far. We've been giddily chatting about it ever since. And we're going to give the biotech a grade in a little bit for how they did in 2015; but first, let's hear some numbers.

Campbell: Alright. Let me dive in and give everyone the numbers they've been waiting for. Q4 revenue was $8.5 billion. That was up 16% from a year ago. Q4 adjusted earnings were $3.32 a share. That was up from $2.43 a year ago. And for the full year, sales were a whopping $32.6 billion, up from $24.9 billion in 2014. And adjusted earnings per share were $12.61, which was up handsomely from the $8.09 they delivered in 2014.

Harjes: I'm just going to reiterate that $33 billion number, because I'm also going to compare it to the guidance that they gave a year ago today. February 3rd, 2015 revenue guidance was for $26 billion to $27 billion. Three different times during the year, they upped the guidance. It ended up being an estimate of $30-$31 -- and then they beat that, too.

Douglass: Yeah. And I think, one of the big things you have to then think about is, okay, so they, on this call, said, "Okay, our guidance for 2016 is around $30 to $31 billion for revenue." Okay, folks, after last year, remembering last year's lesson, I've got to think this is sandbagging. You look at that, you think, "Okay, revenue's going to decline a little bit from 2015, that's not great." Yeah, except that this time last year, they were saying that they'd be $6 billion lower than they ended up getting.

Harjes: Yeah. I'm not personally disappointed at all with the 2016 guidance.

Douglass: Yeah. Well, I think...

Campbell: Well, it would be nice, obviously, if they had jumped out and said, "Yeah, you know, we don't view any of these competing drugs as threats, and we think we're going to deliver $40 billion!" But Gilead Sciences, as you know, tends to reign in the expectations a little bit. And I don't think that's a bad thing. I think, over time, it makes much more sense for management to be conservative than it is for them to be pie in the sky.

Douglass: Yeah, especially because they are conservative, and then, at the very least, they deliver on that conservative estimate. And usually, they beat it handsomely. So you've got managements that talk a big game, and you've got managements that actually play a big game; and this is definitely the latter.

Harjes: So you can't just say, "We expect pretty flat revenue," without giving any good reasons for it. Let's dig into some of these reasons. Why such low guidance?

Campbell: There's a few different things that are going on here that are affecting guidance. You've got an increasingly competitive market here in the United States. You've got, obviously, Viekira Pak's been on the market since last January of 2015...

Harjes: A competing hepatitis C drug.

Campbell: You've got a recent approval -- what's that?

Douglass: A competing hepatitis C drug is what Kristine said.

Campbell: Correct.

Douglass: Although, I have to insert in there, yeah, but Viekira Pak's under 10% market share. So, so far, Gilead's having a pretty good run of it. But, sorry, I'll let you continue.

Campbell: Yeah, no, you're right. Again, they came into 2015 with the same kind of uncertainty, if you will, that they're coming into 2016 with. At the time, they had no idea whether or not Viekira Pak was going to take 10% of the market or 30% of the market. They didn't know whether or not they'd be able to negotiate price reimbursement throughout the European Union. They weren't sure whether or not or when they would launch in Japan.

They weren't sure whether or not government funding would drive patient starts from Medicaid, and patients being treated at the VA. So you look at '15, and you say, "Okay, they had very tepid guidance." You look at '16, it's the same kind of issues: competitive threats, government payers, international launches. So there are a lot of similarities. But at the same time, there are real risks. I think it makes sense for them to be conservative. We don't know how this is all going to shake out.

Harjes: Yeah, and talking about this year's upcoming competitive threats, the stock took a pretty big tumble recently when Merck (NYSE:MRK) got approval of its new hepatitis C drug. Michael, do you want to touch on that a little bit?

Douglass: Sure. That drug is -- I'm going to butcher it.

Harjes: Zepatier?

Douglass: Zepatier. If any listener happens to know or has actually heard someone say it in person, I would love to hear that.

Harjes: (laughs) Please send us a sound byte or something.

Douglass: Yeah, IndustryFocus@Fool.com. Because, it's sort of like... I used to read a lot more than I talked to people. Maybe that's still the case, I don't know. But the first time I read the word 'egotistical,' the first time I said it, I said 'egostical,' because that's how I read it. And then, I was promptly informed by other people that that's not how you said it. So, same deal here in healthcare. We read about these drugs all the time, but sometimes, it's kind of hard to get a good name for it.

Harjes: At least we're not using the chemical names. (laughs) 

Douglass: Yeah (laughs), because those are just completely difficult. So, one of the interesting things, this was addressed in the call, and they basically said, to summarize what Gilead's management said, it was essentially, "Hey, we've got a pan-genotypic hep C drug potentially coming on the market, and the second quarter, beginning of third quarter, is the PDUFA date June 28th, 2016. So that could change things significantly.

Also, we feel pretty good about the price where it is, and we're prepared to draw a line in the sand around the prices we have, because we've got real-world data, a lot of it, showing this is a very safe drug. So when you think about this from a doctor's perspective, why would they prescribe a drug when they've got another one that's got hundreds of thousands of people who've been treated with it, and they know there's no weird things that came up in the phase 3?

The other thing is, they also pointed out, listen, Viekira Pak, a lot of payers jumped on this as, like, "Oh! This is our opportunity to go ahead and cut prices!" And then it got a warning added to the label, and then it got all these other issues that have come up with Viekira Pak. So insurers and payers are taking a more-measured approach in approaching the Merck drug, because you just had this Gilead drug that's got a great label, and they've been a little bit burned when they've tried to go with a competitor.

Campbell: Yeah, it's almost like Merck is raising up its hands and saying, "Me too me too!" Their drug is solid -- Zepatier, we'll call it, why not -- the drug is solid, it's 95%-plus efficacy cure rates. That's fine, that's great, that matches up very nicely to Harvoni. It's arguably as good, possibly better, in safety. It doesn't require as much dose adjustment, depending on if you're co-infected with HIV or some other things. But there are some real hurdles, I think, that could keep doctors from prescribing it. If you look at the label, there's some testing that needs to be done ahead of time to see if there's some polymorphisms, because Zepatier didn't work very well within patients that had those polymorphisms. There's some testing that needs to be done on the liver during the course of treatment that could increase costs. So there are some reasons why doctors would, like you said, Michael, just simply go, "You know what? Harvoni works, I'm sticking with it."

Harjes: Indeed. And you don't get the sense that the company is truly concerned about this competitive threat. Obviously, it's on their radar. They're going to do what they can not to lose any market share. But I don't think it's something that investors need to be truly concerned about.

Moving on to different parts of Gilead's business, what's going on in HIV?

Douglass: The thing that was really interesting to me on HIV, they had this slide, which they presented, which basically showed that, in treatment-naive HIV patients, they've been steadily losing market share. In the third quarter of 2013, it was -- I'm ballparking here -- in the 90s. In third quarter 2014, it was lower. In third quarter 2015, it was, I want to say, 72%. So I think that's a legitimate thing for people to be concerned about.

That said, you've got the next generation TAF-based HIV cocktails. The first one's already online, Genvoya, and its initial ramp looks really strong. You've also got two more that face PDUFA dates in the first half of 2016. And then, also, they're looking at European approvals in 2016, as well, potentially. So they're doing a lot to go ahead and try and grow that market share. One of the things that was really interesting to me, for one of their drugs -- I believe it was Genvoya, but I'm going to double check -- they said about 10% of the patients who'd switched to it had switched from a non-Gilead therapy, indicating that there's that potential...

Campbell: Yeah, I think that's exactly what they said -- 80% were switchers -- 10% were from Stribild; the other 10% came from competitors.

Douglass: Right. Which is great news. It's like, okay, not just maintaining market share, but looking to go ahead and grow it back up.

Harjes: There you go.

Campbell: Yeah, absolutely. And they priced it similarly to Stribild, as well, which, obviously, a lot of people were worried that reinventing Viread and TAF, you would see a price spike that would have precluded some patients from being able to get access to it. So I think they're willing to fight on market share. And if we've seen anything from them on the HIV front in the last 10 years, it's shown that they know how to market these drugs and to compete.

Harjes: Yeah, this is a classic Gilead franchise. This was around before people were ever talking about Gilead and hepatitis C, and it's something that will continue to be a business driver.

Campbell: It's a $12 billion business! We can't forget that. (laughs) A lot of companies would love to have $12 billion in sales from drugs.

Harjes: Yeah, you see the headlines all the time about hepatitis C, but it's really important to note that HIV is also huge for Gilead.

Douglass: And has been their bread and butter for a very long time.

Harjes: Exactly.

Douglass: They've been in HIV for longer than 10 years. So, yeah.

Harjes: So going forward, are there any other treatment areas that we should be keeping an eye on?

Campbell: They've got some interesting stuff going in the pipeline, absolutely. Michael, I don't know if you want to talk a little about the Galapagos deal that they did. They're also working on some treatment for NASH, which is another major cause of liver damage, and that could be, theoretically, at least a billion-dollar drug. Who knows? You never know with these drugs that are in pipelines. But it's clear that they want to expand. They want to take some of this money that they're plowing back into R&D. They want to take some of their money that -- (laughs) their balance sheet has gotten so big! They have some flexibility now.

Harjes: Yeah, it's insane. $26.2 billion in cash and other marketable securities. That's up from $11.7 billion at the end of 2014.

Douglass: Yeah. And they were very clear that they were planning to pursue some partnerships, and potentially, acquisitions. Gilead has always been very, sort of, "Well, we're going to do something when the price is right and the drug is right and we feel like it," basically, which is something I actually really appreciate about them. It's another sign of management not chasing headlines. This is not management saying, "We're going to buy seven companies this year! We're going to buy 15 next year!" They're saying, "Hey, listen, we recognize the market's down. Maybe there's an opportunity, maybe there's not. We have all this cash, but we're going to make sure that we deliver the best shareholder value we possibly can for this cash." And that's something...

Campbell: On that front, Michael, just to jump right in here, I have a quote handy from John Milligan, who's going to be taking over in the top spot at Gilead very soon. In that conference call, he says: "I will continue to work hard to help Gilead's business grow beyond antivirals and into new therapeutic areas." And then, later on, he went on to say, "It's pretty clear that we have to do additional partnerships or find other avenues to broaden the revenue stream there for the future." And then later on, he even adds: "We're very interested in acquiring assets through partnerships, and with the tripling of our revenue over the last few years, the need to do so sooner rather than later is heightened."

Douglass: Yeah, and thanks to S&P Capital IQ for that and any other quotes we mention.

Harjes: So it's interesting that we're talking about buying other companies, and what are they going to do with all this money? Right now, it seems like Gilead's saying the best buy out there in the market right now is our own shares. This is a company that just added another $12 billion in share repurchase agreements after their existing $15 billion one is done, and of course, there's $8 billion left in that old one. Five billion of this is going to be accelerated share repurchasing, so expect this to be completed sometime in this quarter. This is Gilead saying, "Hello, yeah, we're really cheap right now. We're a great buy. We think we're a great buy, you should think we're a great buy; we're buying up our own stock."

Douglass: Well, and what are they trading at right now?

Harjes: Based on 2015...

Campbell: Forward P/E is below seven.

Harjes: Below seven! That's crazy!

Campbell: (laughs) Below seven! To put that in perspective, AbbVie, which is a threat, potentially, to its top-selling drug, has a forward P/E ratio that's like 9.5.

Douglass: Yeah, and we looked at -- I mean, I only looked at Pfizer on a trailing, but theirs was like, 22, I think.

Harjes: Yeah. This is really, really low for any company in this industry, especially one that continually posts pretty remarkable growth. I will say, the one thing I think we're missing in this puzzle here, we haven't yet talked about the CEO news. So recently -- actually, the same day as the Merck approval, I believe -- they announced that long-time CEO John Martin is going to be stepping down from the head position, and he's going to become executive chairman. Current president and COO John Milligan, who I believe we heard a quote from at some point during this episode, is going to become the new CEO on March 10th.

Campbell: This is a brilliant move. Too often you do not have transitions that are smooth and well-forecasted. This is the way to do it. You've got a guy who's been at the helm for 20-some odd years, handing it off to a guy who's been right by his side for 20+ years! This is the way to do it.

Douglass: Yeah, Milligan is definitely seen as Martin's right-hand man, and certainly, they'll appear at different conferences, and in reading through what they've said at those conferences, you can see them very much hewing to very similar philosophies. So I think that, will Milligan be as good for the company as Martin has been? No one knows. But I think that if you've liked Martin's leadership, and certainly we have, Milligan makes sense as the crown prince.

Harjes: So, just in summary to wrap up, when we look back on 2015, John Martin's last full year as CEO, what grade would you give Gilead?

Campbell: I'm going to give Gilead an A-. I would've given it a higher grade if not for one thing. Obviously, they trounced their forecast. They're doing a great job controlling expenses. They launched a dividend. But if I'm going to give it an A, I would have liked to have seen just a little more money flow to that -- and I'm splitting hairs here -- a little more money floating towards that dividend, rather than to buybacks. Even if it was a billion or two.

Harjes: And they did bump up the dividend by 10%.

Campbell: Yeah, they took it up to $0.47 from $0.43.

Douglass: But technically in 2016, so ... (laughs) 

Campbell: Yeah (laughs).

Douglass: I'm going to give them an A- for a different reason. I happen to like that grade. For me, it's the declining HIV new start market share. That is, for me, a potential concern. Now, I think Gilead has a good plan to combat it. But we're just going to have to see how that pans out. So that'll be something that'll go in really strongly in my 2016 and 2017 grades for Gilead, is, how well do they execute on the replacement of the Truvada-backed regimes with TAF instead? And I think we'll learn a lot about Milligan's abilities as we see how this plays out. That said, gosh, on hepatitis C, on forecasting, on partnerships, they nailed pretty much each of those, as far as I was concerned, right on the head. So, it's a strong A-. A 93%, instead of a 90%. 

Harjes: A rounding error.

Douglass: Yes, exactly.

Harjes: Alright, sounds good. So, one more thing that I want to throw out there before I forget is that, as always, people on this program may have interests in the stocks they talk about, and the Motley Fool could have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. Use this as a landing point for some of your research, then go from there.

Another thing, we just launched our podcast center on fool.com. So if you want to check that out, The Motley Fool has a couple different podcasts besides just Industry Focus. Fool.com/podcasts, if you want to see the new page. Let us know what you think.

Thanks everybody for writing in for the book list, by the way! We heard from a lot, a lot of listeners, and it's always great to get emails, I think Michael said earlier on the show, but our email address is IndustryFocus@Fool.com. We do love hearing from you. Also, if you like the show, take a moment and review us. It helps us to get new listeners, and spread out Foolish word.

Thank you Todd and Michael so much for your analysis. I will definitely look forward to seeing some more articles that come out about this and hearing what our other Foolish contributors have to say about Gilead Sciences. Thanks, guys!

Kristine Harjes owns shares of Gilead Sciences. Michael Douglass owns shares of Gilead Sciences. Todd Campbell owns shares of Gilead Sciences and Twitter. The Motley Fool owns shares of and recommends Gilead Sciences and Twitter. 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.