(GILD) Gilead Sciences Earnings Grow With HIV Franchise

Gilead Sciences Inc.’s (GILD) adjusted earnings per share of 95 cents for the second quarter of 2011 were 14 cents above the year-earlier earnings of 81 cents. The earnings growth was driven by a solid top-line performance in the reported quarter. Earnings were however a penny short of the Zacks Consensus Estimate.

Second quarter revenues were up 11% from the prior-year quarter to $2.14 billion. Total revenues also topped the Zacks Consensus Estimate of $2.10 billion. Revenue performance was driven by a robust performance of the antiviral (HIV) and cardiovascular franchises.

The Second Quarter in Detail

Product sales, at $2.04 billion, were up 13% over the prior year due to a strong performance of antiviral products. Gilead’s product sales crossed the $2 billion mark for the first time in the company’s history.

Antiviral product sales for the quarter were up 11% year over year to $1.76 billion driven by solid performance of Atripla and Truvada. Sales bounced back from a weak showing in the sequentially preceding quarter. The top-line weakness in the first quarter emanated from declines in wholesaler inventories in the US and purchase cutbacks by certain state funded AIDS Drug Assistance Program (ADAP) entities in Florida and Texas.

Antiviral revenue in the US was $943.2 million in the relevant quarter, up 6% over the prior year, driven by healthy patient demand. In Europe, antiviral revenue was $697.6 million, up 16% over the prior year also driven by greater demand.

Sales of Truvada, which is a fixed-dose, once-daily tablet containing Gilead’s Viread and Emtriva, were up 11% to $711.3. Sales of Atripla, which combines Truvada and Bristol Myers Squibb’s (BMY) Sustiva, were up 15% over the prior year to $822 million. Higher sales of both the HIV products were egged on by volume expansion in the US and Europe.

Viread for the treatment of HIV and chronic hepatitis B recorded sales of $185.7 million, up 5% over the prior year as volume growth in US and Europe offset weak sales in Latin America.

Other products such as Letairis (for the treatment of pulmonary arterial hypertension) and Ranexa (for chronic angina) recorded sales of $73.6 million (up 22% over the prior year) and $86.1 million (up 42%), respectively, also due to volume growth.  Letairis sales benefited from removal of potential liver injury warning from its label in the US. In conjunction with the label change, patients receiving Letairis will no longer require monthly monitoring of liver function through blood tests.

Gilead’s royalty, contract and other revenues were down 19% to $97.7 million based on lower royalties from Roche (RHHBY) on Tamiflu sales. Tamiflu-related royalties during the quarter were $50.6 million as opposed to $83.8 million in the year-ago period. Demand for Tamiflu has declined significantly from 2009 levels due to the waning of the swine flu.

Guidance Reiterated

Gilead maintained its previously provided guidance for 2011. The company expects product revenue in the range of $7.9 billion to $8.1 billion in 2011, reflecting an increase of 7% to 10% over 2010 product sales. The Zacks Consensus sales estimate for 2011 is at present $8.25 billion.

Product and Pipeline Update

In June 2011, Gilead announced that it has entered into a license agreement with Tibotec Pharmaceuticals, a division of Johnson & Johnson (JNJ), to develop and commercialize a new fixed dose combination HIV drug. The combination drug will bring together Gilead’s pipeline candidate cobicistat and Tibotec’s protease inhibitor Prezista (darunavir). The companies are also negotiating the terms of a second collaboration under which Gilead would be responsible to develop and commercialize a future single-tablet regimen combining four drugs (Prezista, cobicistat, Gilead’s marketed HIV drug Emtriva, and its HIV candidate GS 7340). The agreements with Johnson & Johnson, if finalized, would further strengthen Gilead’s ever expanding portfolio of fixed dose combination drugs for HIV treatment.

The US Food and Drug Administration is due to give its decision on Gilead’s fixed dose combination of Truvada and Tibotec’s TMC278 (rilpivirine) for the treatment of HIV on August 10, 2011. Moreover, Gilead has also submitted a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA) seeking approval for the combo pill. The EMA is expected to deliver its decision by the end of the year.

Gilead is expected to deliver data from late stage studies of another HIV combination pill, Quad, later in the third quarter. The much anticipated Quad pill is a combination of Gilead’s pipeline candidate elvitegravir, cobicistat (GS 9350), and Truvada. We believe these results will be the most significant catalyst for Gilead in 2011. Gilead expects to file regulatory applications for Quad in early 2012.

Our Recommendation

We currently have a Neutral recommendation on Gilead. The stock carries a Zacks #3 Rank (short-term “Hold” recommendation). We are optimistic on the growth potential of Gilead’s HIV franchise drugs, Truvada and Atripla. Moreover Gilead’s strategy of creating fixed-dose combinations of existing HIV drugs has yielded enormous success. However, we are concerned about patent challenges to its key HIV drugs. Hence, we maintain a cautious stance until the current pipeline proves its worth compensating for lost revenues from patent lapses.

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