Healthcare Reform Impact on Gilead HIV Product Sales Surprises Analysts

Gilead Sciences (GILD) lowered its 2010 sales forecast to a range of $7.4-$7.5B from $7.6-$7.8B citing recently enacted healthcare legislation. Net income for the quarter ended March 31 jumped from $854.9M or $0.92/sh. compared with $589.1M or $0.63/sh. in the Year ago period. Gilead’s first-quarter sales increased 24% to $1.79B primarily due to strong sales of its antiviral drugs to treat HIV-related conditions. CFO Robin Washington said the decrease reflects the impact of recently passed U.S. healthcare legislation which would have an sales impact of $200M and an earnings impact of $0.15 sh. in 2010 primarily in the HIV business. Sales of its HIV drug Atripla increased 36% to $692 M for Q1 compared to analysts’ estimate of $726M. Royalties from Roche sales of Tamiflu were $246.3M from increased sales related to the influenza pandemic.

The healthcare reform impact would be  related to pricing of antiretroviral sales in the use from Medicaid and Medicare Part D however no 2011 guidance was given due to the fact that the bill was passed only on March 23. There are also pricing pressures in Europe.

As of March 31, 2010 the Gilead had cash, marketable securities  and cash equivalents of $4.6B compared to $3.9B as of December 31,2009. Cash flow in Q1 was $670.6M.Positive cash flows will continue for some time and there is a $1B share buyback

The Company also stopped a mid-stage Phase II clinical trial of an experimental drug for chronic hepatitus C (HCV) (GS 9450) due to side effects. Analysts were questioning the impact of the pipeline disappointments and what the Company would do with all their cash. Also analysts asked about the Company moving into diabetes and cardiovascular both competitive areas. The Company said that out-licensing of early stage promising pipelines is an option. The major product in the R&D pipeline is the “quad booster” for HIV treatment :  Truvada, elvitegravir (integrase inhibitor) plus GS 9350 and protease inhibitor.

The Gilead shareholder meeting is May 11,2010 in San Francisco.

Analysts from Leerink Swann maintained an outperform rating with a 2011 revenue forecast of $8.894B or $4.06 sh. with a PE of 11.1.  Comment from LS was : “The Company’s HIV franchise is best in class with a 15% potential growth rate from 2009-2012 poised to drive revenues to $10B by year 2012.” LS gave valuation support in the low 40’s with upside to 54.

Piper Jaffray downgraded the stock from Overweight to Neutral and the price target from 60 to 50.Morgan Stanley cut sales guidance and has an equal-weight rating with a price target of 48.Morgan Joseph initiated a sell on February 22, 2010.

Abbott(ABT) was down 2.25% and lowered earnings by 30% updating its 2010 forecast also citing healthcare legislation and requirement for  higher rebates to Medicaid. Impact for Abbott due to healthcare reform would be $230M or 11 cents a share. Abbott was downgraded by Citigroup on March 12 from hold  to sell.

The impact on the broader biotech sector was significant in both large and small caps. Many speculative small cap biotech stocks  were down over 4%. As of midday trading Gilead (GILD) stock is down 10% on volume of 47M but stable at $40.5.Other large cap biotech stocks are down 2% or more: Amgen(AMGN) down 2.7%, Biogen(BIIB) down 1.5%,Celgene(CELG) down 3.5%,Cephalon(CEPH) down 2%,FBT(an ETF) down 1.6% and IBB(an ETF) down 2%. The broad based large cap healthcare ETF (XLV) was down 1.5%.

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