Gilead Beats but Lowers Outlook

| About: Gilead Sciences, (GILD)

Gilead Sciences (NASDAQ:GILD) reported strong first quarter fiscal 2010 results with revenues increasing 36% year-over-year to $2.09 billion. The company’s earnings per share (EPS) came in at 92 cents. However, excluding non- recurring items and treating stock-based compensation as a regular expense, the company’s EPS of 95 cents surpassed the Zacks Consensus Estimate of 91 cents and the year-ago period’s 63 cents.

Revenues

Gilead’s robust growth was driven by strong product sales, especially the antiviral franchise. Product sales increased 24% to $1.79 billion driven by growth in sales of antiviral products such as Atripla (growth of 36% to $692.9 million), Truvada (growth of 11% to $657.8 million) and Viread (growth of 13% to $180.7 million). Healthcare reform impacted product sales by $29.4 million during the quarter.

Antiviral product sales for the quarter grew 19% to $1.60 billion. This is the second quarter in a row, where Atripla recorded higher sales than Truvada. Other products such as Letairis and Ranexa recorded sales of $55.5 million (growth of 40%) and $51.2 million, respectively.

Cayston, which received approval from the US Food and Drug Administration in Feb 2010, recorded sales of $2.9 million during the quarter.

Gilead’s royalty, contract and other revenues recorded a massive increase of 259% to $297.8 million based on higher royalties from Roche (OTCQX:RHHBY) related to Tamiflu sales. Royalties from Tamiflu during the quarter were $246.3 million compared to $33.2 million in the corresponding period last year – a robust increase (642%) attributable to the worldwide preparations to combat swine flu.

Margin & Expenses

On the operational front (excluding non recurring items), operating margin improved 460 basis points to 57.4% primarily on account of an increase in Tamiflu royalties. R&D expenses increased 26% due to higher headcount and increased costs to support various R&D activities. In addition, SG&A expenses increased 24% due to higher headcount and expanded commercial activities.

Cash

Based on its robust performance, Gilead further strengthened its balance sheet. The company exited the quarter with $4.62 billion of cash, cash equivalents and marketable securities compared to $3.90 billion at the end of December 2009. In Jan 2010, Gilead announced a $1 billion share repurchase program of which $837.5 million remained unutilized at the end of the quarter.

Guidance

Although Gilead has posted a strong quarter, it has had to lower its outlook for 2010 due to the healthcare reform. The company expects net product revenues of $7.4 - $7.5 billion compared to the earlier guidance of $7.6 - $7.7 billion, provided along with fiscal 2009 results. However, guidance for gross margin, operating expenses, tax rate etc. remains unchanged.

We are currently Neutral on the stock.

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