Can Gilead Sciences pull another rabbit out of the M&A hat?
The biotech became a Wall Street darling thanks to an $11 billion deal that landed the blockbuster Sovaldi and Harvoni hepatitis C treatments, but the drugs are no longer delivering the same revenue growth that have excited investors.
On Monday, Gilead reported that second-quarter sales of $7.7 billion fell short of analyst expectations. This was the second consecutive quarter that disappointed. The company also modestly cut its revenue forecast for the year by $500 million. The news sent Gilead stock down nearly 8.5 percent today.
What’s the problem with the hepatitis C drugs?
Overall, sales were $3.92 billion, a 19 percent decline. And in the United States, they fell 33 percent, thanks to fewer new patients, higher rebates given to payers, and lower revenue per patient as the mix of payers shifted toward Medicaid and the US Department of Veteran’s Affairs, which typically receive lower prices than commercial health plans. In Europe, there were also fewer new patients and a higher mix of patients in countries where Gilead faces tougher price controls.
So what do analysts foresee? Here is what some of the Wall Street wags had to say:
“While management pointed to increasing screening volumes and confirmed its prior estimate of about 1.5 million people in the US who are yet to be diagnosed, it also anticipates a gradual decline in new patient-starts going forward, especially in mature markets such as the US, Germany, and France,” wrote Deutsche Bank analyst Gregg Gilbert in an investor note.
Needham analyst Alan Carr, meanwhile, wrote that, “although there have been improvements in US diagnosis rates — 280,000 new patients in 2014 and 2015 — these patients often have less severe disease, may not be treated immediately, and require shorter treatment durations. We expect variability in (the number of patients) treated per quarter, but assume downward pressure on revenue will continue.”
As far as RW Baird analyst Brian Skorney is concerned, “this was unexpected. Gilead has a tendency to be on the conservative side when guiding the Street, but in the context of continued concerns over hepatitis C sales durability, even a 2 percent cut (in forecasted revenue) is not going to be looked upon favorably.”
In a call with analysts, Gilead “management reiterated interest in M&A outside of antivirals, but provided little insight into potential therapeutic areas. We continue to believe that Gilead needs an effective deal to improve long-term outlook as hepatitis C sales fade, and see few opportunities for such growth in the company’s existing pipeline as is,” Skorney wrote.
Piper Jaffray’s Joshua Schimmer wrote that Gilead “has not impressed us with its development capabilities beyond HIV and hepatitis C, and we have little enthusiasm for most of what we consider to be a highly speculative pipeline and nowhere close to the level we would expect from such an important and sizable company. We believe the company is in need of stronger development capabilities, or an acquisition that makes its deficient pipeline moot. There is not a single program which we even find worth highlighting.”
But can Gilead pull this off?
In his own investor note, RBC Capital Markets analyst Michael Yee noted that “the company does not rule out a ‘large transaction,’ but it would be hard to pull off, and premiums are quite high. Thus we continue to reiterate that a ‘string of pearls’ — a series of more modest, but strategic acquisitions — is the most likely scenario and would take one-plus years. So investors will need to have patience.”
As Leerink’s Geoffrey Porges wrote: “The outstanding question about Gilead now is what it does next; with nearly $20 billion in operating cash flow … it has plenty of opportunities. So far, its internal pipeline does not seem to have the scope, or probability of success, to materially improve its outlook or offset what increasingly looks like a steadily eroding mountain of hepatitis C revenue.”
Cowen analyst Phil Nadeau summed it up this way: “We suspect that for Gilead’s stock to become a top performer, management must change the conversation among investors from ‘How quickly will hepatitis C decline, and how soon?’ to ‘How much can product X grow Gilead’s revenue?’ Such a turnaround of sentiment is difficult for any biopharmaceutical company, and even more so for one with $30 billion in product sales.”
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