Gilead (GILD) Q4 earnings did not go well.The company delivered revenue of $7.32 billion and eps of $2.70. Gilead delivered a revenue and earnings beat. However, unexpectedly weak guidance caused the stock to sell off about 5%. I had the following takeaways on the quarter.
HCV Revenue Continues To Contract ...
The company's HCV franchise has gone from a superstar to a cash cow. That cash cow now appears to be running out of milk. HCV revenue fell a whopping 17% sequentially in Q3. The decline was only 3% this quarter, which appeared encouraging.
- Revenue in the U.S. was off 1% Q/Q. Many of the sickest patients have already been treated. The company's payer mix has now changed. It is treating patients with shorter durations and/or having to offer steep discounts for the VA and large commercial payers. Management divulged that inclusive of discounts, the volume-weighted average price for Harvoni had fallen below $15,000 per bottle. Secondly, Medicaid paid less than 10,000 per bottle for states opening access to all patients. Even I was taken aback by the rapid decline in asp.
- Europe was up 4% due to seasonality in areas like Spain. Long-term, Europe is beginning to look like the U.S. -- many of the sickest patients have been treated and several others are requiring shorter durations. Add in budget constraints in several regions and Europe will likely continue to decline.
- Japan fell 31% due to the entrant of a competing product. Starts peaked in the year earlier period on Gilead's initial launch.
... While HIV Is Showing Cracks
Last quarter HIV showed itself to be a potential major catalyst; in Q3 revenue from HIV grew 12% sequentially and 21% Y/Y. This quarter the segment was a major disappointment. Atripla and Truvada showed declining to flat growth, which was to be expected. Results from Genvoya and Stribild (included in "others") were mixed. Genvoya did its job, growing 22% sequentially. However, Stribild fell 38%.
Stribild made up 18% of HIV revenue in Q3, making its Q4 revenue loss difficult to overcome. The alarming part was that management did not give a cogent explanation for Stribild's underperformance ... as if it was a mere happenstance. The loss of the HIV catalyst, in my opinion, removes any reason to own GILD at its current price of around $66.
Outlook Left Bulls Apoplectic
Gilead's operating income margins fell to 55% as R&D and SG&A both ticked up; it appears as if the company is working harder simply to maintain single-digit revenue declines. That said, 2017 guidance is what made bulls apoplectic. Management guided that 2017 product sales could be $22.5 - $24.5 billion, and gross margins of 86% to 88%. That implies Y/Y revenue declines from 18% to 25%. Operating income margins could range from 56% to 62%, when the company has been generating margins from 58% to 60% historically.
Declining revenue and declining margins do not bode well for the company. Mind you, management is not even certain it can hit its numbers. When it comes to the HCV market it appears as befuddled as the rest of us. It is projecting 2017 HCV product sales of $7.5 to $9.0 billion. That implies a decline from 39% - 49% Y/Y. Who saw that coming?
Takeaway
With HCV sales expected to free fall, the HCV story appears officially dead. HIV revenue has stalled and there are no acquisitions in sight. GILD got it comeuppance in Q4. I expect it to fall further. GILD remains a sell.