Gilead Sciences Inc. (GILD) reported earnings per share of 90 cents for the fourth quarter of 2010, a penny above the Zacks Consensus Estimate of 89 cents and the year-earlier earnings. The lackluster earnings performance was due to lower revenues and higher expenses.

Fourth quarter revenues decreased 1.5% from the prior-year quarter to $2 billion. Total revenues only marginally topped the Zacks Consensus Estimate of $1.98 billion. Revenue performance was disappointing due to lower royalties from Roche (RHHBY) on Tamiflu sales.

For full year 2010, Gilead reported earnings per share of $3.52, much above the year-ago earnings per share of $2.91. The full year 2010 earnings per share were, however, in line with the Zacks Consensus Estimate. Full year 2010 revenues increased 13% over the prior year to $7.95 billion. The Zacks Consensus Sales Estimate for fiscal 2010 was $7.91 billion.

Besides presenting earnings results, Gilead announced that the US Food and Drug Administration (FDA) has issued a refuse-to-file notice for its New Drug Application (NDA) for its once daily, single tablet, fixed dose combination of Truvada and TMC278 (rilpivirine) as a HIV treatment for adult patients.

The FDA is dissatisfied with a particular section of the NDA due to insufficient information and has requested additional information on the same. The company is working to resolve the issue and expects to submit the information requested by the FDA by the end of the first quarter of 2011.

We believe the combo pill is key to long-term growth at Gilead and the FDA rejection is a major disappointment. However, Gilead believes even with the delay it can still launch the combo pill by the second half of 2011, as previously expected.

Fourth Quarter in Detail

Product sales climbed 7% to $1.93 billion driven by sales growth of antiviral products such as Atripla (up 11% to $775.2 million), Truvada (up 1.6% to $681.7 million) and Viread (up 7% to $191.1 million).

Antiviral product sales for the quarter grew 5% to $1.70 billion. The US market contributed $935 million (up 5.2%) to antiviral product sales driven by growth in patients and market share. Europe contributed $653.9 million (up 2.5%), also driven by growth in patients.

This is the fifth quarter in a row in which Atripla recorded higher sales than Truvada. Sales of both Atripla and Truvada benefited from volume growth in the US and Europe.

Other products such as Letairis (for the treatment of pulmonary arterial hypertension) and Ranexa (for chronic angina) recorded sales of $64 million (up 23%) and $67.8 million (up 47%), respectively, thanks to volume growth. Management expects these products to continue posting strong results in 2011.

Gilead’s royalty, contract and other revenues plummeted 70% to $68.4 million based on lower royalties from Roche on Tamiflu sales. Tamiflu-related royalties during the quarter were $21.9 million as opposed to $194.1 million in the year-ago period. Demand for Tamiflu has declined significantly from 2009 levels due to the waning of the swine flu.

Research & development (R&D) expenses went up by 9.7% to $231.8 million due to increased clinical activity, particularly for HIV and HCV programs. Selling, general and administrative expenses increased 7.1% to $239.3 million due to higher headcount and expanded commercial activities.

Guidance

The company expects product revenue in the range of $7.9 billion to $8.1 billion in 2011, reflecting an increase of 7% to 10% over 2010 product sales. The guidance includes a 5-6% impact of US healthcare reform, as well as the impact of pricing pressures in some countries in the European Union.

Gilead expects gross margins in the range of 74% to 76% in 2011. R&D expenses are expected to be $950 million to $1 billion and SG&A expenses are expected in a range of $1 billion to $1.05 billion. The effective tax rate is expected in the range of 25% – 27%.

Data Presentation

The company announced presentation of positive data from phase III trials of Viread for the treatment of chronic hepatitis B infection at a scientific meeting in October 2010. At the same meeting, the company also presented positive data from phase IIa trials of its pipeline candidates GS 9190 (an oral polymerase inhibitor) and GS 9256 (an oral protease inhibitor) for the treatment of chronic hepatitis C infection. At another scientific meeting, the company presented data from a phase III trial of Cayston versus tobramycin inhalation solution in cystic fibrosis patients with P. aeruginosa.

Recommendation

Currently, we have a Neutral recommendation on Gilead which is supported by a Zacks #3 Rank (short term hold). We remain optimistic on the growth potential of Gilead’s HIV franchise drugs, Truvada and Atripla. However, the company’s HIV drugs are facing patent challenges from companies seeking to launch generic versions of the drugs.

Also, the issues raised by the FDA regarding contamination at Gilead’s San Dimas production facility could add further pressure on the company’s top-line. Further, Gilead’s revenues continue to be unfavorably impacted by pricing pressures in Europe and currency fluctuation.

 
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