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How Gilead Sciences’ Gross Margin Outshines Its Peers

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Gross margins

Despite a year-over-year (or YoY) drop in revenues in 2Q16, Gilead Sciences (GILD) managed to earn gross margins of about 92%. The company benefitted from the reversal of $200 million in litigation charges, which were recorded in 1Q16. Peers such as Biogen (BIIB), Novartis (NVS), and Johnson & Johnson (JNJ) reported gross margins of about 87.2%, 64.9%, and 71.1%, respectively.

If Gilead Sciences continues to report strong gross margins in 2Q16, it could boost the company’s share prices as well as those of the iShares Core S&P 500 ETF (IVV). Gilead Sciences makes up about 0.58% of IVV’s total portfolio holdings.

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Cost structure

The above diagram shows that Gilead Sciences’ research and development (or R&D) expenses were approximately $1 billion in 2Q16, which is a year-over-year (or YoY) growth of about 48.1%. This is mainly attributed to Gilead Sciences’ multiple late-stage research programs as well as the U.S. Food and Drug Administration (or FDA) priority voucher the company purchased.

According to the Regulatory Affairs Professionals Society, “Since 2007, the US Food and Drug Administration (FDA) has issued a handful of special ‘priority review’ vouchers which allow its recipient to expedite the review of any one of its new drug products.”

Gilead Sciences’ selling, general, and administration (or SG&A) expenses have also risen YoY by about 10% from $761 million to $838 million in 2Q16. The rise was a result of high expenses related to various product line expansions as well as geographic market expansions by the company. Gilead Sciences also expects to spend about $250 million–$300 million on branded prescription drug fees in 2016.

According to the FDA, “The Prescription Drug User Fee Act (PDUFA) was created by Congress in 1992 and authorizes FDA to collect fees from companies that produce certain human drug and biological products. Since the passage of PDUFA, user fees have played an important role in expediting the drug approval process.”

In the next article, we’ll discuss Gilead Sciences’ strategy to return value to shareholders in 2Q16.

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