Gilead Sciences' Solvadi Is A Game Changer

| About: Gilead Sciences, (GILD)

Summary

Antiviral products generate about 86% of the total revenues, and the product group is also vitally important for the company's top and bottom line growth.

Sovaldi, already approved in the US, Canada, and Europe, is undergoing a final testing phase in Japan, and indicated extremely positive results at the beginning of this month.

Sovaldi's efficacy emerges from the fact that the drug has a more than 90% cure rate among all the affected patients.

The US has filed a case against the drug, deeming it too expensive and out of reach of many affected patients who might want to use the drug otherwise.

Gilead Sciences Inc. (NASDAQ:GILD) is a research-based pharmaceutical company that is devoted to discovering and developing drugs for unmet medical problems. The company has grown by both organic and inorganic growth over the years.

Revenue Drivers

Gilead divides its revenue base into various product groups, all operable under the same segment. Antiviral products are a major revenue contributor, accounting for 86% of the top line of the company, while 9% of the revenues are attributed to cardiovascular products. Geographically, Gilead is spread across two major regions, with a major chunk of revenues attributed to the US region.

Source: Company Presentation

Recent Performance

Gilead significantly beat the top and bottom line estimates for both the last quarter and fiscal year 2013. The net revenues of the company grew by 15% YoY in 2013, wherein the growth mainly came around the last quarter, which included initial Sovaldi sales of $139 million. For the same reason, sales in the last quarter grew by 21% YoY compared to the same quarter last year. The net revenues of the company stood at $3.04 billion for the latest quarter, compared to analysts' estimates of $2.85 billion. The bottom line for the quarter stood at $791.4 million, up by 3.8%. Per share earnings, however, were cushioned by share repurchases as well. Excluding special instances, the company's EPS grew by 10% and stalled at 55 cents per share, compared to analysts' estimates of 50 cents per share. Full-year EPS stood at $1.81.

Product Portfolio

Two antiviral products, Atripla and Truvada, make up 63% of the total revenues of the company. Antripla received FDA approval back in 2006, and has now become the top seller of the company, with a recorded sales figure of $3.57 billion. Gilead's second-best seller is Truvada that was approved in 2004 and presently accounts for 29% of the company's sales, with reported revenue of $3.2 billion as of the 2013 annual report. Where relatively older drugs continue to sell well, top line growth is largely attributed to newer antiviral drugs. Two drugs, Stribild and Complera, have shown triple-digit growth in sales on an annual and quarterly basis. Stribild's sales grew astronomically by 409% over the latest quarter compared to sales in the same period last year, whereas annual net revenues (specific to the drug) bolstered by 837%. The drug received FDA approval towards the end of 2012, and generated $540 million in its first year. However, it is expected that the drug will become a top seller for the company in the HIV medication category and that it will reach a sales mark of $3.54 billion by 2018. Complera, approved in 2011, showed sales growth of 137% for 2013, generating sales of $809 million.

The company also has high hopes for that Sovaldi, another hepatitis C drug that experienced a very strong performance in the immediate quarter following its approval in the US and EU. The drug received FDA approval towards the end of 2013, and is expected to generate billions of dollars by the end of the present year. As per the company's guidelines, the drug alone is expected to yield about $8 billion in FY2014. Assuming that the other drugs of the company generate the same level of revenue as this year, Sovaldi alone would account for 73% growth in the top line of the company (if it maintains its present-day price for the pills).

Gilead enjoys another strength that serves as a significant hedge against the growing generic market: none of the company's major patents are expiring over the next few years. The only patents on course for expiry are Tamiflu and Viread that expire in 2016 and 2017 respectively. Considering that neither of these drugs account for a significant chunk of revenue, their expiry would hardly have an impact on the margins of the company.

Pipeline

Gilead has a number of products in its pipeline with the possibility of a high success rate. Some very important drugs of the company related to HIV, oncology, cardiovascular, and liver diseases are in their final testing phases and/or are up for approval. The company has come up with an improved version of the soon-to-expire Viread, while Sovaldi is a breakthrough cure for HIV/HCV co - infection. Since Sovaldi is expected to be responsible for generating roughly 40% of the revenues of the company, let us shed some light on the recent events surrounding around it.

Sovaldi is already approved in the US, Canada, and Europe, and is undergoing final testing in Japan that indicated extremely positive results at the beginning of this month. Japan is an extremely crucial market for the drug, since liver cancer is an epidemic in the country, primarily caused due to chronic HCV infection. Gilead announced Phase III testing results on April 2nd, indicating that of 153 people 98% of previously untreated patients achieved undetectable levels of the virus three months after completing 12 weeks of treatment with a combination of Sovaldi and ribavirin. For patients who had received some sort of treatment before the clinical trial, the cure rate was around 95%. Based on these results, Gilead is hoping to submit an application to the Japanese Pharmaceutical and Medical Devices Agency (PMDA) by mid-2014.

Sovaldi's efficacy emerges from the fact that the drug has a more than 90% cure rate among all the affected patients. This cure rate, combined with the fact that the drug triggers fewer side effects compared to previously available drugs in the market portrays it in a highly favorable light. Moreover, it is the first oral medication for the said viral infection, and is at least 20% more effective. Lastly, Sovaldi requires half the treatment duration compared to previously available drugs targeted at HCV. Considering all of these factors, Wall Street analysts forecasted the sales of the drug to be $9.1 billion in 2017.

While Japan is showing positive results for Sovaldi, the US has filed a case against the drug, deeming it too expensive and out of reach of many affected patients who might want to use the drug otherwise. Gilead has priced the drug at $1000 per pill, which amounts to around $84,000 over a 12-week course. It seems rather bizarre for Congress to deem the treatment price unjustifiable, since less effective and longer drug therapies cost roughly around $100,000. They claim that the overall cost of Sovaldi reaches somewhere around $150,000, since Sovaldi needs to be combined with another drug to ensure an effective treatment. However, considering that the company enjoys tiered pricing across the world, which it justifies on the basis of per capita income of respective countries, this makes room for doubt of the unjustified pricing claim in the US. It is possible that the company might have to lower its sales projection for this reason. Nonetheless, the drug will still bring in significant sales for the company.

Conclusion

Antiviral products generate about 86% of the total revenues. The product group is also vitally important for the company from a top and bottom line growth perspective. With a number of strong drugs in its pipeline, the company is well-positioned to grow its cash inflows and invest more in R&D for future breakthrough developments. The company shows a relatively high level of debt on its balance sheet, but with strong projected Sovaldi sales and a reasonable level of cash on its balance sheet, I believe that the company will be able to dispel debt without hindering future growth. Minus the Sovaldi sales projection, the company hopes to realize 7% growth in sales this year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.