As we anticipated, Gilead Sciences, Inc. (NASDAQ:GILD)’s Implied VOL increased ~15-20% on a relative basis from 7/12/15 until today’s close. Interestingly, seasonal patterns in fact held true with GILD reporting $3.15 in EPS beating consensus/our estimates by +11-14% of $2.70/$2.80-$3.05 on net product revenues of $8.2B vs. consensus/our estimates of $7.59/$7.65B. WW HCV exceeded expectations at~$4.9B ($3.415B US), and $1.485B ex-US. Indeed, this translated into >90% market share confirming our thesis that ABBV remains a minimal threat to GILD, and ENTA shares could be weak.
$109.81 remains the key pivot point to trade long against. Only 9-million shares were repurchased at an average price of $102.14, and $14.1B remains from the current repurchase program to support the share price. $3.9B of cash was utilized to retire 46M in warrants related to the 2016 convertible bonds at an average stock price of $113.96.
On pricing, management doesn’t expect high variability quarter to quarter, and the only variability should be based on the public/private payer mix shifting from 70/30 this quarter to 60/40 by year-end. The VA has been notably absent since their funds have already been depleted and GILD expects their funding to be replenished sometime in the fall. This could represent a source of upside to consensus and recall; IMS sales don’t capture these scripts. GILD’s new guidance reflects all of these dynamics with $29-$30B in sales, 88-90% Gross Margins, and a 17-18% effective tax rate. R&D expenses are expected to be $2.8-$3B (from $3-$3.3B) based on faster clinical trial enrollment than anticipated, while the top-end of SG&A was brought down by ~$100M to $3-$3.2B.
We highlight that “International HCV sales” (ex-EU/US) are truly gaining traction growing 103% growth QoQ to $313M from $154M ex-US and growth from this segment should provide a sufficient buffer from any market share gains from ABBV during the 2H2015 (ABBV reported 2Q15 sales of only $385M). In our view, the international segment is only beginning to accelerate. With the recent approval in Japan for GT-2 and expected launch of Harvoni in GT-1 during 3Q15 we believe there are ample reasons for yet a higher HCV peak and anticipate $710M in sales from Japan this year and $1.5B from International/EM, while the EU full year sales could reach $5B+.
HCV Sustainability Continues to be Validated
We once were the most bullish on EU, EM, Japan, and US markets, yet GILD has surpassed even our expected treatment volumes in each of these key markets thus far. We highlight a monumental disclosure from management today, stating that their internal analysis shows that 30,000 new patients per month are being moved from “diagnosed, not under care,” into “diagnosed, under care.” Roughly inline with the 128,000 patients we modeled being diagnosed from DTC advertising, newly diagnosed baby-boomers from CDC screening, and then adding the historical baseline new HCV transmission rate.
Frankly, we are surprised to see our thesis tracking so well on these metrics, and note that there remains upside with management stating, “We have evidence that docs have many patients in the queue and the barrier to treatment are the payers. We and all stakeholders are working hard to encourage testing and awareness. We do try and measure that from diagnosis to under care, (visited doctor within 12 months), 30,000 per month moving under care, and meeting this quite consistently. Takes time to get traction on these things. And we are thinking how can we increase the diagnosed under care group. We are not resting on our laurels.”
Recall, in July 2014, we formed our bull thesis around the fact that the sell-side (MS & GS) was not modeling the HCV market appropriately. Specifically, we argued that the innovation of both an interferon and ribavirin free regimen would grow the patients under care significantly. While the bears were skeptical, in our view, the CDC’s recommendation to screen all baby-boomers and subsequent decision for Medicare/Medicaid to reimburse HCV testing would greatly increase HCV screening, while DTC advertising would help increase patient awareness, and be pushed into the patients “under care.” Indeed, since the 6 quarters when Sovaldi first launched all evidence and facts continue to reaffirm our thesis while refuting the bears (BofAML & GS), one exception has been pricing that has been offset by 2x our expected treatment volumes. Clearly offsetting the higher than expected G/N, has been the treatment volumes, and with many more Rx’s being written than those actually being filled suggests patient warehousing remains an active, albeit less significant factor going forward.
We maintain our 2015 price target of $146 (11.33x our 2015E), but revised our 2015E EPS from $11.24 to $12.69 (+12.9%) implying GILD shares remain well below 10x our 2015E EPS. Finally, we expect a beat and raise guidance regime to now take hold going forward and see ample room for upside in HCV from EM, EU and Japan.