Uptrend In Gilead’s Estimates

Earnings estimates for Gilead Sciences (GILD: 47.61 +0.55 +1.17%) are on the rise following the release of strong fourth quarter and full year 2009 results. The company's earnings per share (EPS) came in at 90 cents, well above the Zacks Consensus Estimate of 82 cents and the year ago quarter's earnings of 59 cents. Full-year earnings increased 41% to $2.91.
 
For the full year, Gilead reported a 31% increase in revenues to $7.01 billion primarily driven by strong growth in its antiviral franchise. Product sales for 2009 increased 27% to $6.47 billion led by the growth in sales of antiviral products such as Atripla (up 51% to $2.4 billion), Truvada (up 18% to $2.5 billion) and Viread (up 7% to $667.5 million).

Antiviral product sales for 2009 grew to $5.84 billion, up 25%. Atripla, with quarterly sales of $697.8 million, became the lead product surpassing $670.7 million of Truvada for the first time.

In a positive development, Gilead recently received the much awaited US Food and Drug Administration (FDA) approval for Cayston for the treatment of lung infection in patients suffering from cystic fibrosis (CF). This will enable Gilead to further diversify its revenue stream. Cayston will primarily compete with Novartis' (NVS: 54.21 +0.42 +0.78%) Tobi, which generated $295 million in global sales in 2009.

We are pleased with the strong outlook provided by Gilead for 2010. On top of a 27% rise in 2009 product sales ($6.47 billion), the company expects to generate $7.6-$7.7 billion in product sales in 2010, representing a growth of 17%-19% over 2009. Gross margin is expected to be in the range of 75%-77%.

Strong Growth Potential

Gilead's strategy of creating fixed-dose combinations of existing HIV/AIDS drugs has been an enormous success. In the US, it is estimated that there are 1.2 million HIV-infected adults. Approximately 79% (948,000) of these have been diagnosed. About 61% of the diagnosed patients (578,000) are taking antiretroviral medications.

Gilead commands a 75% market share (approximately 433,000 patients) within this antiretroviral population. The market in Europe has similar statistics.
 
We believe with a growing patient base, Gilead should be able to maintain growth in its HIV franchise. This is significant as the company earns more than 80% of its revenues from the sale of HIV products.
 
In order to strengthen further its HIV segment, Gilead is working on a four-in-one combination pill, Quad which was recently found to be more effective than Atripla in a phase II study. On approval, Quad has the potential to reach blockbuster status.
 
Gilead has made good progress with respect to its hepatitis B virus (HBV) franchise as well which consists of Viread and Hepsera. At the end of 2009, these two drugs accounted for approximately 53% of total HBV prescriptions in the US. Viread is gaining market share in Europe as well. As of October 2009, Viread's share of the HBV market was estimated to be 19% compared to 7% in October 2008.
 
Gilead is looking to increase its share in the HBV market in Asia also. In Nov 2009, the company entered into a licensing agreement with GlaxoSmithKline (GSK: 37.54 +0.17 +0.45%) to commercialize Viread for the treatment of chronic HBV infection in adults in five Asian countries. We believe expansion into Asia will boost HBV segment revenues.
 
Estimate Revisions Trend

Following the release of strong results and a positive 2010 outlook, many analysts following the stock have revised their estimates. Over the past 30 days, 4 of the 17 analysts following the stock have raised their earnings estimates for fiscal 2010 with only 1 moving in the opposite direction. On balance, 2010 earnings estimates have gone up by 5 cents with the current Zacks Consensus Estimate being $3.42.

Similar positive bias can be witnessed for 2011 as well with 3 of the 16 analysts covering the stock raising their estimates with only 1 doing the reverse. On balance, 2011 earnings estimates have gone up by 6 cents with the current Zacks Consensus Estimate being $3.81.

The upward bias in estimate revisions can be witnessed for the first two quarters of 2010 as well. For the first quarter, 6 of the 16 analysts covering the stock have raised their estimates in the past 30 days. No downward revision has taken place during the same period. However, the trend is mixed for the second quarter of 2010 with 4 of the 17 analysts covering the stock raising their estimates with 2 analysts moving in the opposite direction.

In terms of earnings surprises, earnings exceeded the Zacks Consensus Estimate in each of the last four quarters, with a four-quarter average of 6.71%. This means that on average, earnings beat the Zacks Consensus Estimate by 6.71%.

Our Recommendation

We currently have an Outperform recommendation on Gilead, which is supported by the Zacks #1 Rank. We remain optimistic about the growth of HIV/AIDS franchise drugs Truvada and Atripla. Earnings over the past few quarters have consistently been above expectations, specifically on strong sales of the HIV franchise products.

Meanwhile, the worldwide panic regarding swine flu has boosted the company's royalty income, a trend we expect to continue, thanks to increased sales of the anti-viral drug Tamiflu.