Gilead's Earnings Might Point To A Potential Turnaround In Coming Year

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About: Gilead Sciences, Inc. (GILD), Includes: ABBV, GLPG, ICPT
by: Terry Chrisomalis
Summary

Gilead posted a solid Q1 2019 earnings report and even guided revenue for the rest of the year close to what analysts are expecting.

HIV revenue was the highlighted winner in the earnings growing from $3.2 billion in Q1 2018 to $3.6 billion in Q1 2019, with the main driver being sales of Biktarvy.

Sales for the Hepatitis C business continue to decline, but expansion of the Kite Unit, NASH programs, and filgotinib could save the company in the long run.

The new CEO Daniel O'Day is looking to shake things up in a big way by putting the $30.1 billion cash to work in terms of M&A activity and internal R&D for growth.

Gilead Sciences (GILD) seemed to have found its stride after reporting its latest earnings for Q1 2019. That's because it reported a really good quarter. So much so that earnings were 28% higher for the quarter. A big reason earnings came out so well is because of the HIV franchise, which saw sales climb higher than anticipated. The company still has a long way to go to return growth for its company in other parts of its business, but the new CEO has committed to a new strategy in boosting many of its pipeline prospects.

Earnings Better Than Anticipated

I view this most recent quarter for earnings as a major win for Gilead Sciences. Revenue came in just about in line with expectations at $5.28 billion. It's good that revenue came in line. However, more will need to be done to get this number higher in the coming quarters. On the other hand, earnings per share was the game-winning metric for the quarter. It was noted that earnings per share came in at a 1.76 per share on a Non-GAAP Diluted basis, which is a 19% year-over-year growth. Analysts were only expecting it to reach 1.61 per share, so this became a beat by 15 cents. Revenues for full year 2019 are still anticipated to be the same as prior guidance that was noted back in February of this year. It is seen that revenue will be between $21.3 billion and $21.8 billion. This is pretty close to analysts expecting about $21.9 billion in full year 2019 sales. The conclusion here is that, despite Gilead facing pressures on some fronts of its pipeline, it was able to squeeze out a pretty solid quarter.

Main Sales Driver For Earnings

The biggest reason for revenue doing so well during the quarter is because of the HIV franchise, which Gilead has always been known for. Sales for the HIV franchise came in at $3.6 billion during Q1 of 2019. This metric is important for two reasons. The first reason is the massive amount of growth that this program has achieved. What I'm talking about here is that the $3.6 billion in sales was a 14% year over year growth. That means this metric grew by double digits, and that's always good to see. The second reason is that the HIV sales for the entire program grew from $3.2 billion in Q1 2018, to $3.6 billion in the current quarter. The biggest help for the HIV program came from Biktarvy, which was first approved in the U.S. back in February of 2018. Sales in Q1 of 2018 were very low, but Gilead expected that the drug would see a huge pickup in sales. That's exactly what has happened since that estimate analysis. What do I mean by that? Well, Gilead made a note in its slides that, over a certain amount of time, Biktarvy would become the number one single-target regimen (STR) for HIV patients who are treatment naive and switch patients. This is exactly what took place with this drug, because it has been dominating the HIV market. If this is the case, then what is the proof of this? It's important to look at two examples. The first is looking at the U.S. market alone. It was noted that Biktarvy was the number one prescribed regimen for switch patients and those who were treatment naive. Then, the same thing can be said on the European front for both France and Germany. In my opinion, these two facts back up the claim for the dominance of Biktarvy. The reason why I think the drug did so well in these territories is because it is a single tablet regimen for HIV. As opposed to patients typically having to take a cocktail of drugs. Believe it or not, but Biktarvy started out Q1 2018 with only $35 million in revenues. The most recent report marks just about 1 year since the drug had launched. Sales for the drug in Q1 2019 reached $793 million, which was way above analysts' expectations of $648 million. Not just Biktarvy alone. Both Descovy and Genvoya are also doing their part in keeping the HIV program on solid footing. That's not all for Biktarvy, because there are two other items that provide evidence on why sales should start to get better for Biktarvy. The first of which is that this drug was approved by Japan's Ministry of Health, Labour and Welfare (MHLW). Secondly, the drug is expected to launch in Italy and the United Kingdom by mid-2019. As these catalysts translate into Gilead's HIV sales, I can only see this program getting better.

Lagging Sales For Certain Programs

Gilead's biggest problem is its Hepatitis C program. In terms of Hepatitis C, sales in Q1 2019 reached $790 million. Now, just looking at that metric alone, one would say that's pretty good revenue. However, looking at it in terms of how much it made the prior year makes this number look bad. In Q1 of 2018, sales for the Hepatitis C business unit was $1 billion. As you can see, year over year, that is a steep decline in sales. I'm on the fence about this program, because I don't believe that it was Gilead's fault for sales coming down. A big reason why sales for Hep C drugs have been declining is because the amount of patients to be treated are shrinking. As people start to be cured by taking Hep C treatment, less people need the treatment. With a shrinking population, this market is eventually going to shrink to a point where hardly any revenue can be made. Plus, at the same time, you have some competitors taking some market share as well like AbbVie (ABBV) with Mavyret. However, AbbVie didn't fare as well either. Global Hepatitis C sales for AbbVie came in at $815 million in Q1 of 2019. The truth is that Hepatitis C sales are going to continue to decline for all companies that have a foothold in this space.

Getting Back To Growth With NASH Space

Gilead suffered several setbacks thus far this year for its NASH pipeline. These are the failed studies known as STELLAR-3 and STELLAR-4. While this is bad news, it's important to point out that selonsertib (ASK1 inhibitor) was being tested alone in both of these studies. I still believe that the future of NASH treatment lies in combination studies. It's going to take 2 or more drugs to be able to successfully treat NASH. To date, no single pharmaceutical company has been able to successfully handle NASH with only 1 drug alone. Intercept Pharmaceuticals (ICPT) came close though with its drug Ocaliva, meeting on the primary endpoint of fibrosis improvement with 1 point or greater. However, the other primary endpoint of NASH resolution with no worsening of liver fibrosis failed to be met. The good news is that Intercept can still file for FDA approval, because only one primary endpoint needed to be met. That still doesn't change the fact that it is very likely Ocaliva will have to be combined with other drugs to completely help patients with NASH fibrosis. Gilead may have suffered a problem with selonsertib alone, but the good thing is it has another study that is exploring this drug. This time around, selonsertib is being given to patients in combination with other drugs in a phase 2 study known as ATLAS. The combination to treat NASH patients for this study involves selonsertib, cilofexor, and firsocostat. Cilofexor is a Nonsteroidal Farnesoid X Receptor Agonist, and firsocostat is an allosteric acetyl CoA carboxylase (AC) inhibitor. The primary endpoint for this phase 2 study is ≥ 1-stage fibrosis improvement without worsening of NASH at week 48. Secondary endpoint is NASH resolution without worsening of fibrosis. My theory here is that, even though some drugs given only as a monotherapy fail in clinical studies, they sometimes tend to have better efficacy when combined with others. Even if you set aside the ATLAS program, which is set to be read out in Q4 of 2019, Gilead still has made a multitude of partnerships for its NASH program. Granted most of these partnerships are in the early stages of development, they still offer lots of potential for the NASH program. This involves a deal with a biotech by the name of insitro. Gilead agreed to pay an upfront payment of $15 million to insitro to develop 5 targets for NASH. Then, insitro is eligible for up to $1.05 billion in milestone payments. This is just one of the most recent examples of a deal made by Gilead for NASH. Another deal done at the beginning of 2019, involved a South Korean biotech by the name of Yuhan. Again, this NASH deal also involved only an upfront payment of $15 million with the potential to earn $770 million in milestone payments. Despite setbacks, it is good that Gilead has multiple shots on goal to succeed for its NASH program. Having so many partnerships for NASH doesn't guarantee success, but it definitely increases the odds.

Cell Therapy Program With Slow Start, But Solid Uptake Soon Enough

The cell therapy business had a slow start. For instance, it only produced $96 million in sales in Q1 2019. While that number appears to be small right now, it does show that sales for this segment grew by 19% quarter over quarter. Then, you have to look at in terms of the prior year. Sales for Yescarta in Q1 2018 were only $40 million. A lot is being done to greatly increase sales. For instance, expanding the treatment so that more patients have access to it. To accomplish this, there are more centers being added constantly. There are about 75 authorized Yescarta centers in the U.S. and then 25 in Europe. While the program looks bad right now, I believe things will only get better for it. My belief for that is the projection in which the company has made. Gilead believes that 2019 annual revenue for the cell therapy business unit is expected to double. That's all great, but what about the future of this business? I will say that the future looks really good when you see the development path being implemented. There are 3 trials using Yescarta in clinical development and then 3 other trials using KTE-X19 in place. Both Yescarta and KTE-X19 are products known as chimeric antigen receptors (CARs). How are these products going to drive value for Gilead? For starters, these 6 studies are set to report clinical data starting in Q3 of 2019 all the way to the 1st half of 2020. That means an extensive amount of clinical data is going to be unveiled soon enough. There are also other preclinical programs in place for the cell therapy program as well. That gives investors an opportunity to capitalize in the short term on a potentially higher stock price. In addition, if positive results are achieved in most of these studies, it provides solid footing for the long term. You have other catalysts coming soon as well. For instance, ASCO 2019 coming up towards the end of the month looks very promising in terms of incoming data. There is going to be preliminary data presented on earlier steroid use with Yescarta in patients with relapsed/refractory large B-cell lymphoma. The most notable catalyst for ASCO would be the phase 2 ZUMA-2 study, where results from this study using KTE-X19 to treat patients with relapsed/refractory mantle cell lymphoma are going to be presented. With positive results, I could see investor sentiment for Gilead shifting for the better. Not only that, but in addition, Gilead may be able to even seek accelerated approval based on the ZUMA-2 study if the results warrant such a move.

Filgotinib Might Be Another Saving Grace

Above, I pointed to some instances where some programs have been not performing well. There is hope for Gilead Sciences and its partner Galapagos (GLPG), because they have a solid program that will definitely be a big help for growth. This involves the use of filgotinib to treat a multitude of autoimmune diseases. The most advanced program for filgotinib is known as FINCH, which is looking at treating patients with rheumatoid arthritis. The global rheumatoid arthritis market is expected to reach $30.4 billion by 2025. This involves three total studies, all of which have already been reported known as FINCH 3, FINCH 1, and FINCH 2. All these studies achieved the primary endpoint, which was to obtain an adequate ARC20 response. FINCH 1 and FINCH 2 looked at an adequate ARC20 response at week 12. While FINCH 3 was checking to see a superior ARC20 response with filgotinib at week 24. The latest reported data shows that the drug is solid enough for approval to treat patient with rheumatoid arthritis. The only downside that I can see with respect to this program is the FDA's response as to when Gilead could possibly file for regulatory approval. That's because it is not clear for the time being if the phase 2 MANTA safety study for filgotinib will be required before FDA approval. The safety study is needed to determine whether or not filgotinib causes testicular toxicity. Despite this potential temporary roadblock on the FDA front, the European front is a whole other story. Gilead believes that it will be able to file a marketing authorization application (MAA) for filgotinib to the European Union by the 2nd half of 2019. Even if you were to take a good luck at this program as a whole, you would see that it is solid. Other target indications besides rheumatoid arthritis include:

  • Ulcerative colitis
  • Crohn's disease
  • psoriatic arthritis
  • Ankylosing spondylitis
  • Sjogren's syndrome
  • Lupus
  • Uveitis

The risk for Gilead is that there is a lot of competition in this space. Especially, since AbbVie (ABBV) has its own RA drug upadacitinib, which is also a JAK1 inhibitor. However, AbbVie is a bit more ahead with its drug. That's because the NDA for upadacitinib was accepted back in February of 2019. The FDA is expected to review this drug by Q3 of 2019. The good news is that the RA market is large enough where multiple pharmaceutical companies can benefit.

New CEO Means A Shift In Strategy

The best news yet for Gilead is a new CEO coming on board by the name of Daniel O'Day. For starters, he is in the process of hiring a CEO for the Kite Pharma Unit. Despite being an expert in Oncology himself, he would like to fill the role of leadership at Kite Pharma to handle that program as a separate entity. In my opinion, this is a good thing. The reason why I state that is because I believe that would allow Daniel O'Day to focus all efforts on the other programs that Gilead has. I also like his new two prong strategy approach. By this I mean implementing new M&A transactions and advancing new internal pipeline candidates. Wait a second, how does he hope to accomplish all this? The biggest reason is because of the large amount of cash on hand. As of March 31, 2019, Gilead has $30.1 billion in cash, cash equivalents and marketable debt securities. That means I expect the company to make some substantial acquisitions in 2019 to add to the business. I expect the focus of M&A to be similar in nature to programs that already exist in the company's pipeline. I think it has enough candidates for the NASH pipeline, so I don't see an acquisition in that area. One particular area might be for the cell therapy pipeline. I believe that the Kite pharma unit program is solid. However, the cell therapy program could benefit with some acquisitions for targeting other types of cancer indications. There are plenty of those types of biotechs out there. Maybe Gilead should consider looking at expanding its pipeline into the ever-growing gene therapy space as well. At this early stage of the game for gene therapy, I believe such an acquisition could offer investors a bright outlook for the future of the company. In any case, I think with Daniel O'Day at the helm, that $30.1 billion in cash will be put to good use. Both in M&A activity and in boosting internal R&D as well.

Disclosure: I/we 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.