The biotechnology sector has been one of the best-performing sectors in the United States, with companies registering EBITDA margins (earnings before interest, tax, depreciation, and amortization) above 30%.
The above graph shows that Gilead’s EBITDA margins are in line with those of its competitors Amgen (AMGN), Biogen (BIIB), and Celgene (CELG). However, in 2014, Gilead Sciences (GILD) began to report substantially higher EBITDA margins, as its HCV (hepatitis C virus) drugs Sovaldi and Harvoni proved to be highly successful in US markets.
Gilead Sciences’ expense breakdown
Compared with expenses in 1H2014, Gilead Sciences’ (GILD) total operating expenses rose by 19.2% in 1H15. In 1H15, the company’s R&D (research and development) expenses accounted for 8.7% of its total revenues. Gilead’s R&D expenses as a percentage of total revenues were lower than those of its peers Amgen, Biogen, and Celgene, at 17.8%, 18.5%, and 20.8%, respectively. Gilead’s R&D investment, an indicator of the company’s future performance, was lower than that of its peers as a result of much higher revenues from its HCV drugs.
Gilead is involved in several research initiatives related to already marketed products, such as developing TAF-based (tenofovir alafenamide) HIV drugs with a stronger safety profile and expanding indicated use for the HCV drug Harvoni. Additionally, the company is involved in research related to developing a cure for HIV as well as expanding product lines in the fields of oncology and treatment of inflammatory, respiratory, and cardiovascular diseases.
Compared to 1H14, Gilead’s cost of sales, or material costs, rose by 10% in 1H15. Gross margins have also increased due to a change in the company’s product mix, as sales of HIV drug Atripla declined and costlier HCV drugs proved very successful in the US market.
Gilead Sciences is also involved in developing commercial capabilities for its newly launched products, as well as marketing its existing products. The significant investment required to develop and train a sales force as well as to market the products has led to a rise in the company’s selling expenses.
Investors can get diversified exposure to high margin Gilead Sciences by investing in the iShares NASDAQ Biotechnology ETF (IBB). IBB holds 7.89% of its total holdings in Gilead Sciences.