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Gilead’s Profit Margin Squeezed by Drop in Hepatitis C Drug Sales

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Gilead Sciences’ profit margins

Gilead Sciences (GILD) declared its 2Q16 earnings on July 25, 2016. The company reported diluted earnings per share (or EPS) of about $3.08 in 2Q16, which is a year-over-year (or YoY) decline of 2.2%. Gilead Sciences’ quarterly revenues also fell YoY by about 5.7% and reached approximately $7.8 billion in 2Q16.

 

In 2Q16, Gilead Sciences’ total earnings also fell by around 10.3% from $4.6 billion in 2Q15 to $4.1 billion in 2Q16. The company’s net profit margins also fell YoY by about 9.4% and reached 50.2% in 2Q16. While sales of the company’s HIV franchise rose, they were offset by the drop in hepatitis C (or HCV) drug sales. Peers such as Biogen (BIIB), Johnson & Johnson (JNJ), and Novartis (NVS) reported net profit margins of about 37.1%, 24.9%, and 16.7%, respectively.

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Weak HCV performance

In 2Q16, Gilead Sciences witnessed a YoY decline of about 12% in total product sales in the US market, which was around $4.9 billion. HCV sales in the US accounted for $2.3 billion in revenues in 2Q16, which was a YoY drop of around 33%. The company’s HCV franchise saw lower revenues per patient in 2Q16, as drug prices fell due to higher manufacturer rebates and discounts given to health insurers. Additionally, the exhaustion of warehoused demand in 2015 led to a significantly lower number of new patient starts for Harvoni in 2Q16.

The company, however, witnessed a sequential rise in HCV drug sales in the US in 2Q16 due to a $270 million adjustment to HCV sales reserves. Sales also increased due to distributors stocking up their inventory for the recently launched pan-genotypic HCV drug Epclusa.

Product sales also dropped by approximately 18% in European markets to about $1.6 billion, as there were fewer new patients opting for Gilead Sciences’ HCV drugs. Additionally, strong patient growth came from European countries that have negotiated for lower net prices. Japan also witnessed a sequential drop in product sales of around 43%, as fewer new HCV patients started on Harvoni therapy. The company also experienced the negative impact of mandatory price cuts required by the Japanese government for Sovaldi and Harvoni.

If HCV revenues continue to suffer, it may prove to be a setback for Gilead Sciences’ share price as well as that of the iShares Russell 1000 ETF (IWB). Gilead Sciences makes up about 0.55% of IWB’s total portfolio holdings.

In the next article, we’ll discuss growth opportunities for Gilead Sciences’ HCV franchise in greater detail.

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