Here are some thoughts after listening to the conference call and taking notes. I’ll try to limit my thoughts to those not listed in the press release.
In order to try to get a feel for where Gilead is going, I think it is more important to compare the linked quarters as opposed to last year’s quarter by geography and specific to HCV.
US HCV sales were flat at $5.6 Billion
Europe HCV Sales were down to $1.7B from $2.0B.
Japan/Other HCV sales were up to $1.0B from $0.33B.
I’ll get back to the US as well as a general themes throughout the call.
Specific to Europe, quarter over quarter sales were down due to summer seasonality as everyone there takes the month of August off. They increased sales 17% year over year after an 11% ForEx reduction and are confident in their growth prospects.
Sales in Japan are strong and increasing significantly based on new approvals there.
Going back 7 quarters ago Gilead began an incredible 4 quarter run of sales and earnings growth. The last three quarters growth has been more muted albeit nothing to scoff at. So what will drive growth at Gilead while the comps become more difficult?
There were some common themes throughout the call surrounding insurance payers and the total addressable market. Management believes the warehousing effect in the US is over. The new patient rate seen in Q3 and the upcoming Q4 should be indicative of 2016 as contracts are already in place with their customers (payers) for next year.
This suggests we can expect relatively flat US Sales for HCV moving forward through next year. However, below are some snippets from the call that suggest growth is attainable.
First, Harvoni has been incredibly successful in terms of curing patients. They are excited about the “real world” data that is coming in and believe this will help payers recognize the benefits over time. They continue to work hard at educating governments and payers and the incoming data will support their case.
Second, they believe as the new patient population levels out next year, payers will be able to plan for future costs and work them into their budgets accordingly (read: increased insurance costs for us).
Third, they continue to see a portion of the patient population being declined for treatment. A “fibrosis score” is done for sick patients. Those with F0 and F1 are not getting treatment. Those with F2 are difficult. F levels above that weren’t mentioned so let’s assume they are getting treatment. As real world data bolsters their argument, they hope to get more of these “not as sick” patients on treatment.
Fourth, they currently see 40% of patients on an 8-week treatment. They believe that number should be 70% meaning a lower cost for payers per patient and potential room to treat more patients annually.
Fifth, in terms of the total addressable market, management remains very optimistic. They site programs that are in place to increase screening. In the United States, the incidence rate of the disease is nearly double what was expected prior to screening. They state only a tiny fraction of the diagnosed patients have been treated and literally none of the undiagnosed.
Sixth, what about Express Scripts? As many know, they won’t allow Harvoni and offer Viekira Pak (VP). Gilead was asked if they would charge Express Scripts full price if they wanted Harvoni now. Management said they are open to talking to ES but that would have to be their decision.
Now for my commentary on GILD as an investment.
Simply put, GILD doesn’t deserve a TTM PE of 9.3!!!
They have a dividend yield of 1.6% and are buying back stock in droves. The $11.1B left on their share buyback plan equates to 6.7% of shares outstanding. Last quarter they returned $3.1B of the $4.1B they generated in cash back to shareholders. Their cash balance is over $25B after issuing $10B in bonds.
Competition will have a monumental hurdle to surpass Harvoni after their head start and complete success thus far. The safety profile for Harvoni has been excellent along with cure rates. I think this along with pricing concerns are overblown.
They continue to innovate and bring to market new drugs. It seems this is completely discounted by investors.
Also discounted is the potential for management to repeat what they have done in the past to get to this point - make a great acquisition. Certainly nobody should expect them to land the next Harvoni as it is the biggest drug launch in history, but we can believe management will make a prudent decision when the time is right based on their track record.
I’m happy to wait until the market gives them a multiple they deserve.
Phew - That was a very long post for me. I’m interested in other’s thoughts.
Take care,
A.J.