Gilead Has A Lot More Explaining To Do
Summary
- GILD's Q1 earnings results left some questions unanswered.
- Its Q1 revenue fell 10% Q/Q. Sales of Descovy for PrEP could be hampered by the effects of COVID-19.
- The patent infringement lawsuit from BMY could make Yescarta dead money.
- It could take an incremental $1 billion to manufacture and produce remdesivir to treat COVID-19, yet the incremental revenue is unclear.
- GILD remains a hold.
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Source: Barron's
Gilead (NASDAQ:GILD) reported Q1 2020 revenue of $5.55 billion, Non-GAAP EPS of $11.68 and EPS of $1.22. The company beat on revenue and Non-GAAP EPS, but missed on EPS. The stock was down in the high single-digit percentage range in afternoon trading. I had the following takeaways on the quarter.
Growth Appears Dead For Now
Gilead's HIV franchise has been a workhorse for the company over the past few years. It has more than picked up the slack left by the demise of HCV. In Q1 the company generated product sales of $5.5 billion, down 6% sequentially and up 5% Y/Y.
Revenue from HIV fell 10% sequentially. Biktrarvy rose 8% after rising 25% last quarter. At $1.7 billion in revenue, Biktarvy is Gilead's top-selling drug and the No. 1 prescribed HIV regimen in the U.S. It has cannibalized sales of other Gilead products, but has also prompted customers to switch from drugs provided by GlaxoSmithKline (GSK).
Traction for Decovy for PrEP could slow. Revenue from the drug was $458 million, up 5% Q/Q. Its growth could not be enough the offset the 47% decline in Truvada. Switches for treatment and prevention patients may have been negatively impacted by COVID-19 as people defer healthcare visits. In April, the company observed reductions in Decovy for PrEP initiations and lower switch volume.
If the economy is in recession territory for a protracted period - and I anticipate it will be - then initiations and switch volume for Descovy could face strong headwinds. Descovy and Biktarvy represented 52% of total HIV sales. Truvada (10% of HIV sales) is expected to face generic competition this year. If the dismal economy trips up Descovy then HIV sales could actually decline for the rest of 2020.
HCV revenue of $729 million rose 16% Q/Q. The franchise has been negatively impacted by competitive dynamics pursuant to net pricing. Sales increased due to a favorable rebate accrual adjustment and higher share. You never know what to expect from HCV quarter to quarter, but I expect it to trend lower long term. Yescarta revenue bounced 15%. I was surprised by this, given that it had been flat for the previous two quarters. It still may not be the catalyst GILD bulls once thought.
Costs also fell hard during the quarter. Gross margin was 87% vs. 71% in Q4. Last quarter Gilead suffered $500 million in inventory write-downs due to slow-moving raw material and work in progress related to HCV products. The unfavorable impact in Q4 was a major reason for the variance in gross margin this quarter. R&D costs were $1.1 billion, down over 40% Q/Q. Gilead phased out collaboration payments and other R&D investment, offset by investment in remdesivir. SG&A costs were $1.1 billion, down 11% Q/Q due to seasonality of promotional expenses and lower spending due to the impact of COVID-19.
The fallout was that operating income more than doubled Q/Q. Combined costs for SG&A and R&D were $2.2 billion, or about 39% of revenue. They declined from 53% of revenue in Q4. This is one example of the levers Gilead has to pull in case its top line falters. I expect more cost reductions if consumer spending does not rebound after the economy reopens.
Gilead Has More Explaining To Do
The earnings report left some questions unanswered related to Yescarta and remdesivir.
Is Yescarta Dead Money?
The double-digit revenue growth for Yescarta was encouraging. The question remains, "Is any growth in Yescarta ethereal?" Gilead lost a patent infringement suit to Bristol-Myers (BMY) pursuant to Yescarta (B-cell non-Hodgkin lymphoma). Claims from Bristol-Myers could cost about $1.2 billion. Gilead has ample capital and cash flow. I can sustain the potential hit to capital. However, it also could be forced to pay a running royalty of 27.6% of Yescarta sales through the expiration of Juno's (Bristol Therapeutics unit) patent in 2024. That could hurt sentiment.
Yescarta's sales tripled from $40 million Q1 2018 to $120 million by Q2 2019. It was flat through Q4 2019, and bounced in Q1 2020. It has to contend with Novartis's (NVS) Kymriah, which generated Q1 2020 revenue of $93 million, slightly less than the $96 million reported in Q4 2019. Yescarta outperformed Kymriah in Q1. That could change if it has to pay royalties to Bristol Myers. Until the patent infringement ruling is overturned, Yescarta could be dead money over the long-term.
Profit Potential From Remdesivir
GILD is up about 20% year-to-date on the potential for remdesivir to treat COVID-19. The drug met the primary endpoint in a recent Phase 3 clinical trial. Safety and efficacy still needs to be fully confirmed for FDA approval. Gilead has offered the drug for emergency use in the U.S. and Europe. It also plans to donate 1.5 million doses of remdesivir and has pledged to make the drug accessible and affordable to governments and patients globally.
Countries must reopen their economies or risk falling deeper into recession. That requires securing an effective treatment for COVID-19. An FDA-approved remdesivir would likely be in high demand by the U.S. and other countries. I envision entire countries potentially stockpiling the drug, which could drive up the price at the initial time of sale or in the aftermarket.
On the earnings call management explained it could cost an additional $1 billion to manufacture and develop remdesivir, yet the revenue potential is unclear:
On the revenue side, it is just as Andy mentioned also and I mentioned, it's too premature. You know there's a lot of moving parts right now. Our focus will be on making sure we come up with a sustainable model that allows us to provide Remdesivir to patients around the globe that is intent on providing access and affordability. We're just now going through the clinical data, the demand scenarios, the regulatory approvals, all these things are essential for us to put inputs into our plan about how that will work post the donation. So we can't really give more insight into that at this stage, but certainly when we can we will. On the expense side, Andy, I mean, obviously you had mentioned already that up to $1 billion and unclear on how the accounting will occur. But perhaps you want to add something else to Michael's question.
The run-up in the stock was based on excitement of remdesir's potential to treat COVID-19. On the face of it the revenue potential appears tremendous. However, until management can articulate clear revenue and profit estimates from its incremental investment then it could be hard to defend the run-up in the shares.
Conclusion
The revenue and profit potential in remdesivir remain difficult to ignore. GILD remains a hold.
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Comments (44)
is shocking the street available through a non-seeking alpha form?
From that kinda-sorta response, it appears the answer is "no".
BY UPI
— 6:07 PM ET 05/01/2020
The U.S. Food and Drug Administration on Friday granted emergency use authorization for the antiviral remdesivir to treat COVID-19.Although clinical trials of the drug for treatment of the novel coronavirus, SARS-CoV-2, have produced mixed results, the largest study to date suggested that up to 50 percent of those given the drug for a five-day period showed improvement in symptoms.Roughly the same percentage were well enough to be discharged from the hospital within two weeks of receiving their first dose of the drug, which is delivered intravenously.The agency said the drug has not been approved as a general treatment for COVID-19. Rather, it is only intended for emergency use on severely ill patients who have been hospitalized."Today's action is an important step in our efforts to collaborate with innovators and researchers to provide sick patients timely access to new therapies where appropriate, while at the same time supporting research to further evaluate whether they are safe and effective," FDA Director Stephen Hahn said in a statement.The larger study, conducted by the drug's manufacturer Gilead Sciences ( GILD
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), found participants who received the drug within 10 days of symptom onset had improved outcomes compared to those treated after more than 10 days.The time to clinical improvement for 50 percent of patients was 10days on a five-day regimen of the drug and 11 days for patients on a 10-day regimen.By day 14 of treatment, 65 percent of the participants in the five-day treatment group and 54 percent in the 10-day treatment group achieved clinical recovery.By day 14, 62 percent of patients treated early were also able to be discharged from the hospital, compared with 49 percent of patients who were treated late, Gilead said.Another study published earlier this week by The Lancet found that COVID-19 patients treated with remdesivir were twice as likely to develop severe breathing problems, including acute respiratory distress syndrome, than those treated with placebo.However, the study also said that those given the drug recovered up to five days faster than those who received standard care without it.
There are others who appreciate views that are different from their own, provided that they are argumented properly.Your title fits with this comment from Michael Yee/Jefferies at the earnings call:
"A billion] [ph] of expenses and not knowing the revenue, its an interesting position."Gilead does have to explain how they plan to market RDV.
emcrit.org/...
And an observation based on a lancet study(which is negative on this drug):
"What's interesting is that there was no change in viral load -- Look at the graphs. Million drugs with biologic plausibility that never showed real benefit, but never a drug without biologic plausibility being exciting "
www.gilead.com/...
Revenues increased by 6% YoY. You got some explaining to do as well, Shock Exchange...
no offence.