Despite overdelivering on fourth quarter 2016 earnings, shares of Gilead Sciences dropped six points in overnight trading on Tuesday, on the back of poor 2017 sales estimates.
The investor reaction was summed up in the headline of a Seeking Alpha post on Wednesday: “Gilead: Dreadful Guidance Inspires Fear.”
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Sales of its chronic hepatitis C virus (HCV) treatments decreased from over $19 billion in 2015 to almost $15 billion in 2016. Looking ahead to 2017, the company expects between $7.5-$9 billion in revenue from its franchise — significantly less than consensus estimates.
Gilead’s 5-day NASDAQ trading price highlights disappointing earnings call. Source: Yahoo Finance
There’s no denying the golden years of HCV sales are behind it. More and more companies are entering the space, driving actualized prices down. The overall patient population is also declining in the developed world — making Gilead a victim of its own success curing hepatitis C.
When the patents have expired, what will remain of this Foster City, California-based biotech?
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Many investors are shouting for decisive acquisitions to restock the pipeline and shore up its valuation. And, according to the earnings call, Gilead has $32.4 billion in cash reserves to fund the deals (though experts noted its debt is nearly as high).
“We feel very good about our cash flow for the future,” said Gilead CEO John Milligan, in response to an investor question during the call. “I think it’s still for us a desire and a need to have a right strategic fit for the company. That is the driver for why and when we do any mergers or acquisitions or partnerships, much more so than the need for cash flow, because we feel very comfortable about where we are.”
Gilead’s modern identity was born in 2011, through the home-run acquisition of Pharmasset for approximately $11 billion. Pharmasset had three clinical-stage candidates for the treatment of chronic hepatitis C virus. One of those was sofosbuvir.
Just two years later, Gilead secured FDA approval for sofosbuvir, commercializing what is now known as Sovaldi. In its first 30 weeks on the market, 62,000 new patients tried the drug.
Gilead has worked hard to maximize its hep C sales, despite public outcry over costs. It introduced its 12-week Sovaldi regimen with a list price of $84,000 in the United States. Other nations get bigger discounts.
It paid off: Sovaldi was a blockbuster. But, inevitably, patents expire and investors ask ‘what’s next?’
Gilead has directed a lot of resources towards advancing its clinical pipeline. According to Tuesday’s earnings call, R&D costs soared to $1.2 billion, an increase of almost 60 percent in the fourth quarter.
The biotech has 28 clinical programs underway. Along with HCV and HIV, Gilead is pursuing programs in oncology and non-alcoholic steatohepatitis (NASH), a potential blockbuster field. A 2014 Deutsche Bank industry report, titled “NASH — the next big global epidemic in 10 years?” estimated that the market could peak at $30-40 billion by 2025.
If it was to reach into its cash reserves and acquire a company, who would it be?
Oncology company Incyte was one of the front-runners for some time, but it is looking pretty expensive with a market cap of $23.12 billion.
Intercept Pharma has a market cap of $2.8 billion and specializes in non-viral liver diseases, suggesting it could be a good fit.
Galapagos is also in the race, with a valuation of $3.2 billion. Its JAK1 inhibitor, filgotinib, is partnered with Gilead Sciences in three separate trials targeting rheumatoid arthritis, Crohn’s disease and ulcerative colitis. Galapagos is also investigating treatments for cystic fibrosis and osteoarthritis.
A deal will be needed eventually. In the meantime, Gilead is doing O.K. In Q4 of 2016, sales from almost every major drug the biotech sells came in above expectations. Overall revenues fell 14 percent from the previous year’s, but still beat expectations by around $150 million.
It seems the world’s largest biotech is struggling with the same pipeline and innovation trials as its pharma counterparts, after the breakthrough success of its hepatitis C franchise. Who know’s if it can buy its way out and sustain its global revenues.
Photo: Bill Oxford, Getty Images
