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3 Key Takeaways Following Gilead Sciences' Second-Quarter Conference Call

Image source: Flickr user Bill Brooks.

Gilead Sciences, Inc.'s (NASDAQ: GILD) second-quarter earnings conference call offered arguably tepid support to long-term investors who are eager to see the company kick-start sales and profit growth. Despite improving results for its HIV drugs, weakness in hepatitis C led to a year-over-year drop in revenue and net income in Q2. Is Gilead Sciences ready to turn things around? Here are three key things to know now that the second quarter is officially in the books.

Cancer expansion is a dud (so far)

When Gilead Sciences launched Zydelig for chronic lymphocytic leukemia in 2014, the prevailing expectation was that the company would soon become a leader in blood cancer treatment. Unfortunately, Zydelig has been plagued by safety concerns that have significantly limited its use, and as a result, its sales represent a fraction of the billion-dollar market.

Zydelig's sales totaled only $41 million last quarter -- a far cry from rival Imbruvica, which won FDA approval for use in CLL around the same time as Zydelig and is generating sales at an annualized run rate of $1.3 billion.

Zydelig has been such a disappointment that Gilead Sciences management didn't even bother mentioning it during its earnings conference call with investors last night. In fact, oncology itself was mentioned only three times, and that was because a Wall Street analyst asked about it.

Although it appears that Gilead Sciences' interest in oncology has cooled, management hasn't given up on the indication altogether. Results from a phase 3 study of momelotinib in myelofibrosis, an uncommon leukemia, should be available later this year and could lead to a filing for approval in 2017.

CEO John Milligan also said he is "committed" to the indication and he's interested in "assets, collaborations, and partnerships." That could mean he'll consider deals that fortify Gilead Sciences' cancer-drug pipeline. A dramatic slowing in the company's pace of share buybacks adds fuel to that thinking. In Q1, the company spent $8 billion buying back its stock, but management repurchased only $1 billion in stock during Q2.

Absent a deal, however, Gilead Sciences appears to be more focused on other pipeline candidates than it is on oncology. Specifically, drugs targeting nonalcoholic steatohepatitis (NASH), a major cause of liver cancer, were prominently highlighted during the conference call.

HIV dominance continues

Last year, Gilead Sciences won the FDA nod for a reformulation of Viread, a common HIV medicine that's a core component of combination therapies sold by Gilead Sciences. This new formulation, which is called TAF, is arguably safer than Viread, and as new combination therapies that include it are rolling out, Gilead Sciences' market share in the indication is being reinforced.

The first of these next-generation combinations to reach the market is Genvoya. Since winning FDA approval last November, Genvoya has become the most prescribed treatment regimen in treating naive and experienced patients. In fact, its launch is the most successful for the company in HIV since the rollout of Atripla -- Gilead's first combination therapy -- a decade ago.

A lot of Genvoya's sales are admittedly coming at the expense of Gilead Sciences' previous-generation regimens, but not all of its sales are due to cannibalization. New regimens like Genvoya are capturing market share from competitors, too. For example, about 10% of patients who switch to Genvoya are doing so from non-Gilead Sciences drugs.

Last quarter, Genvoya sales totaled $302 million, and thanks to its strength, Gilead Sciences' HIV sales jumped 23% from last year, to $2.2 billion. The launch of the additional combination drugs Odefsey and Descovy also helped the company's HIV revenue improve 11% since Q1.

Image source: Gilead Sciences, Inc.

Hepatitis C headwinds remain

Gilead Sciences' Harvoni revolutionized the way doctors treat genotype 1 hepatitis C in 2014, but now that competitors have launched their own genotype 1 drugs, Harvoni sales are falling. In Q2, Harvoni's sales fell 29% from a year ago, in large part because of price cuts.

In addition to suffering steeper discounts to maintain market share, Harvoni's sales were also negatively impacted by a growing proportion of patients being covered by public programs that pay less for the drug. In the quarter, roughly 45% of new patients were covered by public programs.

Revenue headwinds due to competition and payer mix aren't likely to abate any time soon, but the company should continue to enjoy solid demand for its drugs because millions of HCV patients remain untreated. So far, 1 million patients globally have been treated with Sovaldi or Harvoni, including 500,000 in the U.S., but more than 150 million people worldwide are estimated to still have HCV, including 3 million Americans.

Although Harvoni's sales aren't likely to reignite from here, Gilead Sciences' HCV sales could see some improvement following the approval of Epclusa in June. Epclusa is approved for use in all genotypes of HCV, but the company hopes to position it primarily as the go-to option in genotype 2 and 3. Roughly 25% of the HCV patient population is genotype 2 or 3, and inventory building following Epclusa's approval translated into $60 million in sales in June alone.

Planning ahead

Gilead Sciences' top and bottom line are struggling this year, but there are reasons for optimism. If momelotinib's data is good, the company could have a new cancer drug on the market by the end of 2017. Similarly, additional launches of next-generation HIV combination therapies, including TAF, could bolster sales, as could another HCV drug, SOF/VEL/VOX, that has data coming later this year. Additionally, efforts in NASH and a recently started phase 3 trial of filgotinib in rheumatoid arthritis may support sales further out. Because the company remains the market-share leader in HIV and HCV, and it's got a flurry of research and development programs underway in addition to some of the deepest pockets in biopharma, it's hard for me to think of this year as anything other than a transition year. If that's truly the case, investors who spread out purchases of the stock through dollar-cost averaging over the coming months could be rewarded down the line. 

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Todd Campbell owns shares of Gilead Sciences. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him on Twitter where he goes by the handle 

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