Gilead’s slog downward accelerates; CEO’s growth reassurances need action–now

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The News:

Gilead Sciences Inc. (Foster City CA) on Tuesday (February 7, 2017) said that it anticipates full-year revenue for 2017 to be in the range of $22.5 billion to $24.5 billion, falling short of analysts’ expectations of $27.9 billion. At the mid-point, the guidance represents a 22-percent decline versus 2016 sales of $30 billion, says FirstWord Pharma.

@GileadSciences anticipates 2017 revenue to fall well short of expectations of $27.9 billion Click To Tweet

The company said it expects 2017 hepatitis C sales to be in the range of $7.5 billion to $9 billion, down from $14.8 billion last year and below analysts’ forecasts of $11.6 billion. Gilead explained that competition from other therapies and shorter treatment duration for patients will reduce sales this year by $1.9 billion to $2.5 billion, while fewer new patients starting on the drugs will result in $2.9 billion to $3.8 billion less in 2017 sales.

“This is a challenging situation,” remarked CEO John Milligan, adding that the hepatitis C market is “declining faster this year than we would have predicted last year.” Milligan acknowledged that it would be “challenging to grow without some sort of acquisition” outside its HIV franchise.

Meanwhile, non-hepatitis C revenue is projected to be between $15 billion and $15.5 billion this year.

For the fourth quarter of 2016, Gilead reported sales of $7.3 billion, down from $8.5 billion in the year-ago period, but beating analysts’ projections of $7.2 billion. Meanwhile, net income in the three-month period reached $3.1 billion, versus $4.7 billion in the prior year.

In the quarter, Gilead reported sales of the hepatitis C therapy Harvoni fell by more than 50% year-over-year to $1.6 billion, while revenue from Sovaldi reached $541 million, down from $1.5 billion in the same quarter of 2015. Analysts were anticipating sales of $1.6 billion for Harvoni and $587 million for Sovaldi.

On the brighter side, Epclusa, which was authorized last year in the US and EU for the treatment of all six genotypes of hepatitis C, racked up $1.1 billion in sales in the fourth quarter, up from $640 million during the prior period. Analysts had anticipated revenue of $901 million for the drug in the last quarter.

Steve’s Take:

Grow or Die. A premise that’s pervaded the American business scene, public and private, for a long, long time.

Biopharma CEOs are accustomed to fielding the occasional tough question from Street analysts during earnings conference calls, but Gilead CEO John Milligan was still caught unawares by one query, after Gilead launched thoroughly disappointing 2017 guidance. And then there was the fact the company had just lost $9 billion in market value after its stock crashed.

Mark Schoenebaum of Evercore ISI asked Milligan to contemplate the $30 billion in revenue Gilead bagged in 2016 and then consider this: “[C]ould you grow the company without an acquisition?”

(Speaking for Milligan: “Grow the company? Well, there’s that little $32-billion cash pile sitting over there. Pretty nice, yes? You don’t mean I should buy something, do you?”)

It was far from the first time Milligan had faced questions about M&A and its importance for future growth, FiercePharma points out. With sales of its game-changing hepatitis C drugs, Sovaldi and Harvoni, slipping 32% and 34% respectively during the year, investors have been pressuring Gilead to do something big to inject new innovation into the pipeline. But Schoenebaum asked Milligan to think about that $30 billion haul as a starting point and “just riff on it.”

Milligan obliged with a succinct and fairly witty comment, starting with the one big challenge that largely explains why Gilead’s stock has lost 40% of its value over the last 18 months:

“We don’t have a lot of things launching over the next few years,” Milligan said.

On top of that, Gilead is facing patent losses on several products, including Letairis to treat pulmonary arterial hypertension and angina drug Ranexa.

And “that makes it challenging for us to grow without some sort of acquisition,” Milligan said.

Now that’s corporate riffing if there ever was such.

It’s not that Gilead had a bad quarter–on the contrary, fourth-quarter product sales of $7.2 billion and net income of $3.6 billion beat consensus estimates. What vexed investors was how poorly Gilead expects its 2017 results to come in.

Full year net product sales are only expected to land between $22.5 billion and $24.5 billion, notes the Motley Fool. Not only does this range represent a dive of nearly 22% at this midpoint, but it’s also miles from the $26.3 billion in revenue that Wall Street was predicting.

The guidance was so feeble Piper analyst Joshua Schimmer issued a note after the call declaring:

“It stinks–but if you hold your nose, it’s not that bad.”

Schimmer is hopeful Gilead’s HIV franchise will help make up for losses on the hepatitis side of the business. He pointed out that future growth could come from new product entries like Genvoya, a single-tablet treatment known as a TAF-based regimen. The product surpassed $1 billion in sales in its first year and was the most widely prescribed HIV drug in the US, according to Gilead. That helped drive antiviral product sales up 27% in 2016 to $9.1 billion.

A closer look at Gilead’s forecast also provides cause for heartburn. Gilead projects that Hepatitis C (HCV) sales–that includes Sovaldi, Harvoni, and Epclusa–will land between $7.5 billion to $9 billion. For perspective, this figure was $14.8 billion in 2016.

To add insult to injury, Gilead is projecting that revenue from non-HCV product sales will come in between $15 billion and $15.5 billion. This figure was just shy of $15 billion for all of 2016, so this forecast represents minimal growth year-over-year.

Given the tornado of bummer news, it’s little wonder why shares cratered.

Looking back to gain perspective on today, Gilead achieved a scientific breakthrough when it developed a cure for hepatitis C, the viral infection that can have severe and deadly complications.

The company’s biggest problem these days appears to be that it works, noted MarketWatch.

“We believe investors expected guidance to be light… just not necessarily this light,” said JP Morgan analyst Cory Kasimov.

Company executives were frank as to the reasons why: “Our expectation is that patient starts in 2017 will be lower than in 2016” for Gilead’s key hepatitis C franchise, said COO Kevin Young.

Last year’s patient counts were lifted by new access to two large US health insurers and more patients treated through the VA, Young said. But Gilead isn’t likely to benefit again from those this year, he added.

A changing patient population is also expected to stymie revenue growth, Young said: “Patients with less advanced forms of hepatitis C, for whom there will be less urgency to use the company’s pricey medications, and patients with other reasons to delay medication use, such as other simultaneous medical conditions, ongoing drug or alcohol use and unstable living situations.”

The effect is visible in the US but is expected to move and “fast” to other countries, including Germany, France and the United Kingdom, Young said.

Though Gilead’s HIV franchise should power some growth, there aren’t many new launches coming out in the next few years and patents are expiring on some products, including hepatitis B medication Viread, said Milligan. Management named lower-than-expected hepatitis C market share and slower-than-expected HIV franchise growth as among the uncertainties affecting guidance.

With sales flagging, the focus on Wall Street has shifted to potential merger and acquisition activity. But analysts, reading into the year’s guidance, see plenty of reasons to be concerned.

Gilead will need to do three or four deals below about $20 billion and meet expectations over the next two quarters to regain its stock strength, said RBC Capital Markets analyst Michael Yee.

Kasimov said he was maintaining an overweight rating for Gilead, although “our frustration on the lack of a clearly articulated strategy continues to grow.”

Though many pharmaceutical companies stand to be affected by the uncertainty around the Affordable Care Act, Gilead is especially vulnerable, with many state and federal programs picking up the tab for its key medications.

“The company’s current risk is accentuated by challenges to their US market sales from public insurance repeal or reform, from patent expiries over the next 18 months, and from new and potentially disruptive competitors in their two leading therapeutic categories,” said Leerink analyst Geoffrey Porges, who maintained a market perform rating and reduced price target by nearly 20% to $74.

Gilead shares have dropped 10.8% over the past three months, compared with a 7.1% rise in the S&P 500.

While the overall take away from this report is clearly negative, there were a handful of positives that are worth pointing out. Gilead’s spending may be on the rise, but the company is doing so in order to advance its promising pipeline. Currently, Gilead has 28 clinical studies in progress, 10 of which are in late-stage trials. That fact should give investors some comfort that this company is investing in its future.

Gilead also continues to have a war chest of cash at its disposal. The company ended 2016 with more than $32 billion in cash on its books, which gives its plenty of capital heft to buy back stock or make a major acquisition that gets Wall Street’s thumbs-up.

Finally, income investors will likely be delighted to hear that the company raised its dividend by 10%. Its new quarterly payout of $0.52 per share gives shares a yield of more than 3% at current prices.

But don’t be misled by these noteworthy positives. The negatives from this earnings report more than offset any of the good news. With revenue and profits expected to plummet for the foreseeable future, it’s hard to imagine why the markets wouldn’t remain bearish until the company can put its cash hoard to work.

During the earnings call, Milligan said Gilead is out looking for acquisitions that “are the right strategic fit with our company.” When pressed for details, he would only say that the point of pursuing a deal wouldn’t be to drive cash flow in the short term but rather to boost the pipeline.

Gilead’s troubles have some investors thinking of the company more like an automaker than an innovator of cutting-edge medicines, says FiercePharma. Indeed, value investors have been looking at the company’s slowing growth and low price-to-earnings ratio and diving in, hoping a sales and earnings boost will come eventually. And with shares down 9% to $65.54 Thursday (February 9, 2017) morning, Gilead may look even more enticing to value investors who can afford to be patient.

Grow or die. Markets are impatient. Just ask Erez Vigodman, the former CEO of Teva, who resigned suddenly earlier in the week, presumptively because growth under his watch didn’t come up to snuff. In some quarters he was even attributed with blame for patent setbacks on the company’s star Copaxone medicine.

Bottom line:

Gilead’s Milligan can riff all day about what needs to happen to assuage Wall Street’s current concerns. But patience isn’t one of the Street’s virtues, no matter how big your cash pile might be. And yes, Gilead’s pipeline–overlooked, by and large–is decent. But that’s not what analysts and investors value.

It’s not, “what have you done for me lately?” And, “what will you do for me this year?” also doesn’t cut it.

“What can you do for me, now?” That’s the 64-dollar question.

Steve's Take: @GileadSciences needs a major acquisition to stop the market-cap hemorrhaging Click To Tweet

Buying an Incyte or Galapagos could be the only realistic move likely to quell the gut wrenching, market-cap hemorrhage. Accomplish that, Mr. Milligan, and then it might be feasible to start the long climb back up.

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