Analist over Gilead.
GILD grew Q2 2019 revenue 8% Q/Q. Is it sustainable?
HIV continues to be the stalwart, but HCV and LOE could weigh.
GILD chugs along. Until it can generate consistent revenue growth the stock remains a sell.
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Source: BarronSource: Barron's
Gilead (GILD) has been delivering uneven revenue growth over the last few quarters. Q2 2019 results showed promise, yet they followed an 8% sequential revenue decline in Q1. Gilead is chugging along, but I consider the stock a sell until it can deliver consistent top line growth. Heading into Q2 earnings the company was facing falling revenue within its core HIV franchise. Gilead had to cut costs to preserve margins. Management chalked up the Q1 decline to seasonality and a change in payer mix that moved more toward public payers. Its revenue growth in Q2 was more robust, however. Total Q2 total product sales of $5.6 billion rose 8% sequentially.
Q2 2019 product sales
HIV sales were $4.0 billion, up 12% Q/Q on higher prescription demand. Biktarvy was the star again this quarter with $1.1 billion in product sales, up over 40% Q/Q. It surpassed the $1 billion mark for the first time and is now Gilead's top selling product.
Biktarvy's U.S. prescriptions have traditionally been driven by switches from Genvoya and dolutegravir-based regimens. This likely explains why sales from Genvoya fell 3% this quarter. Nonetheless, Biktarvy is helping Gilead grow its HIV franchise, which is a good thing. It could be the company's most-important product in the near term.
HCV revenue of $842 million grew 7% Q/Q. HCV product sales from Europe grew 36% Q/Q. Europe benefited from an $80 million adjustment for revenue claw back reserves pursuant to sales in prior periods. Sans this claw back reserve, total HCV revenue would have fallen. Long term, HCV revenue will likely decline due to competition from AbbVie's (ABBV) Mavyret and new generic drugs introduced by Gilead.
Gilead still has enough scale to drive higher margins, in my opinion. Gross margin was flat, in the 82% range. SG&A and R&D costs were a combined 39% of revenue, versus 40% in Q1. As a result, EBITDA of $2.7 billion was up 7% Q/Q. EBITDA margin was 49%, the same as Q1. However, I get the impression management can adjust SG&A or R&D costs as needed in order to maintain margins.
LOE Kicks In
Heading into the quarter Gilead faced a loss of exclusivity ("LOE") for heart drugs, Letairis and Ranexa. They generated a combined $352 million in Q1 2019. In Q2 they generated a combined $223 million, off 37% Q/Q. Sales from Letairis actually grew as inventory was favorable in comparison to a draw down in Q1. Management indicated Letairis prescriptions were eroding due to generic competition. Its revenue is expected to decline going forward.
Teva's (TEVA) generic version of Truvada could arrive in 2020. Atripla could face generic competition by 2021. Truvada, Atripla, Letairis and Ranexa generated combined product sales of $1.1 billion, or about 19% of total product sales. LOE for these products could become a point of contention over the next few quarters.
Gilead Pulls The Trigger
Last month Gilead made a $1.1 billion equity investment in Galapagos (GLPG), (OTC:GLPGF) and a $3.95 billion upfront payment to access Galapagos's current and future drug pipeline. On the Q2 earnings call management talked up the ability of Galapagos to discover new drugs:
As you know, Galapagos is a highly productive R&D engine. They have seven medicines now in clinical development including filgotinib, which has a very comprehensive of life cycle program. And they have more than 20 medicines now in preclinical and their model has been very productive at producing new candidates for the clinic every year. And of course with our increased investments we would expect that to even increase in the future.
This is a really unique collaboration because it combines complementary strengths between Gilead and Galapagos and very importantly and, as you know, we structured this to allow Galapagos to remain independent ... They can invest and innovate to accelerate the progress based upon our investments. And in return we have an exclusive access right to their proven drug discovery platform.
Gilead has a core competency in (1) acquiring companies with drugs in late stage clinical trials and (2) helping target companies develop and market those drugs. The Galapagos arrangement is a departure from previous blockbuster deals, yet it is a good thing the company is putting capital to work. Gilead has $30 billion in cash on hand. In my opinion, the Galapagos deal seems more financially attractive than buying back its own stock.
Gilead will help Galapagos develop filgotinib, a drug to treat rheumatoid arthritis and other inflammatory diseases. The treatment is in the latter stage of clinical trials. The rheumatoid arthritis market was estimated at around $22.6 billion in 2018. The market expected to grow in the low single digit range over the next five years. Prospects for filgotinib sound promising. However, Cantor Fitzgerald analyst Alethia Young believes many of Galapagos's programs beyond filgotinib are less-developed. In my opinion, Galapagos was a headline-grabbing deal, yet meaningful financial returns may not be realized for several years.
Conclusion
GILD is down 15% Y/Y. Until the company generates consistent top line growth I rate the stock a sell.
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