Gilead Sciences Inc.'s aversion to business development has come full circle to bite the Foster City, Calif.-based biopharma where it hurts: in its share price. Gilead, which last year surrendered its market cap lead – a position it had held for about three years – to Amgen Inc., watched its shares swoon to a three-year low of $65.75 Wednesday after 2017 guidance for its hepatitis C virus (HCV) franchise came in approximately $3 billion to $5 billion short of already-lowered expectations.

Delivering the sobering forecast during its fourth-quarter and year-end 2016 earnings call following Tuesday's market close, Gilead officials predicted 2017 sales of HCV products in a range of $7.5 billion to $9 billion, compared to 2016 sales of $14.8 billion in the product category. Investors revolted, sending shares tumbling 10 percent Wednesday before they regained some ground to close at $66.83 for a loss of $6.30. Volume of 49.3 million shares was more than five times the stock's three-month moving average.

Gilead's shares last traded below Wednesday's close on April 15, 2014.

Gilead reported 2016 fourth-quarter revenues of $7.3 billion compared to $8.5 billion for the same period in 2015 and fourth-quarter net income of $3.1 billion, or $2.34 per diluted share, compared to $4.7 billion, or $3.18 per diluted share for the same period in 2015. Full-year 2016 revenues were $30.4 billion compared to $32.6 billion for 2015, while net income for the year was $13.5 billion, or $9.94 per diluted share, compared to $18.1 billion, or $11.91 per diluted share for 2015.

Fourth-quarter sales were $7.2 billion compared to $8.4 billion for the same period in 2015. U.S. product sales edged up in the fourth quarter, to $4.9 billion from $4.8 billion in the fourth quarter of 2015, but were lower in Europe – $1.4 billion compared to $1.7 billion a year earlier – and fell dramatically in Japan, to $314 million from $1.4 billion in the same period in 2015.

For the year, Gilead reported $30 billion in sales compared to $32.2 billion in 2015. On a regional basis, 2016 sales fell to $19.3 billion in the U.S. from $21.2 billion in 2015 and to $6.1 billion in Europe from $7.2 billion the previous year but rose to $2.5 billion in Japan from $1.9 billion in 2015 and to $2.1 billion in other locations from $1.9 billion a year earlier.

Antiviral sales, including sales of HIV and HCV products, were $6.6 billion for the fourth quarter of 2016, compared to $7.9 billion for the same period in 2015. For the full year, antiviral product sales were $27.7 billion compared to $30.2 billion in 2015.

But distinctions between the HIV and HCV product categories were stark. In the fourth quarter, HIV and related antiviral sales were $3.4 billion compared to $3 billion for the same period in 2015. For the full year, HIV agents generated sales of $12.9 billion compared to $11.1 billion in 2015. Gilead attributed the increases primarily to continued uptake of its tenofovir alafenamide-based products, Genvoya (elvitegravir 150 mg/cobicistat 150 mg/emtricitabine 200 mg/tenofovir alafenamide 10 mg), Descovy (emtricitabine 200 mg/tenofovir alafenamide 25 mg) and Odefsey (emtricitabine 200 mg/rilpivirine 25 mg/tenofovir alafenamide 25 mg), partially offset by decreases in sales of tenofovir disoproxil fumarate-based products.

Genvoya was approved by the FDA late in 2015, followed by 2016 approvals for Odefsey and Descovy. (See BioWorld Today, Nov. 6, 2015.)

HCV product sales, consisting of Harvoni (ledipasvir 90 mg/sofosbuvir 400 mg), Sovaldi (sofosbuvir 400 mg) and Epclusa (sofosbuvir 400 mg/velpatasvir 100 mg), were $3.2 billion for the fourth quarter of 2016 compared to $4.9 billion for the same period in 2015 and $14.8 billion for the full year compared to $19.1 billion in 2015. Gilead blamed the declines on lower sales of Harvoni and Sovaldi, partially offset by sales of Epclusa, the pan-genotypic, fixed-dose combination that contains the active ingredient of Sovaldi and velpatasvir, an NS5A inhibitor. Epclusa was approved by the FDA last June, prompting a rolling launch. (See BioWorld Today, June 29, 2016.)

'WE DON'T HAVE A LOT OF THINGS LAUNCHING'

So far, so good, according to analysts, who anticipated declining sales and generally pronounced the quarterly and full-year numbers in line with or slightly above expectations.

But the other shoe dropped one-third of the way through Gilead's slide deck with the projection of plummeting HCV sales this year. Robin Washington, the company's executive vice president and chief financial officer, blamed a combination of factors, citing "accuracy of our estimates of HCV patient starts in 2017, unanticipated pricing pressures from payers and competitors, lower than anticipated market share in HCV, slower than anticipated growth in our HIV franchise, and [increases] in discounts, chargebacks and rebates due to ongoing contracts and future negotiations with commercial and government payers."

Washington cautioned that Gilead faces "a larger than anticipated shift in payer mix to more highly discounted payer segments," mentioning fee-for-service plans along with the U.S. Public Health Service, Medicaid and the Veterans Administration (VA). Outside the U.S., the company is losing market share and suffering from price erosion caused by the introduction of generic options. Like other biopharmas, Gilead also is navigating the "uncertain global macroeconomic environment [and] potential amendments to the Affordable Care Act or other government actions that could have the effect of lowering prices or reducing the number of insured patients," she pointed out, as well as the usual "volatility in foreign currency exchange rates."

Those pressures make Gilead's pipeline more important than ever. During the fourth quarter, the company reported $1.208 billion in R&D expenses compared to $757 million in the same period in 2015. For the year, Gilead had R&D costs of $5.098 billion compared to $3.014 billion in 2015. The company said R&D costs were higher in 2016 due to the progression of clinical studies and its purchase of an FDA priority review voucher.

Gilead also owed payments in 2016 to Galapagos NV, of Mechelen, Belgium, as part of their phase III collaboration on Janus kinase (JAK) 1 inhibitor, filgotinib, in rheumatoid arthritis, ulcerative colitis and Crohn's disease, and to Nimbus Therapeutics for the purchase of wholly owned subsidiary Nimbus Apollo Inc. That deal, for $400 million up front and $800 million in development-related milestone payments, included a phase II-ready and preclinical allosteric acetyl-coA carboxylase inhibitors to treat non-alcoholic steatohepatitis (NASH), hepatocellular carcinoma and other metabolic and liver diseases. (See BioWorld Today, April 5, 2016, Aug. 24, 2016, and Sept. 27, 2016.)

But some analysts worry that Gilead so far has little to show for the increased R&D spend. The company had a win in November when Vemlidy (tenofovir alafenamide) won FDA approval, as expected, to treat adults with chronic hepatitis B virus infection with compensated liver disease. (See BioWorld Today, Nov. 11, 2016.)

But a week later, Gilead suffered a late-stage pipeline setback after a pair of phase III trials evaluating JAK inhibitor momelotinib (formerly GS-0387) in myelofibrosis missed key efficacy endpoints. (See BioWorld Today, Nov. 18, 2016.)

Last year the company also halted studies seeking to expand the label for its oral PI3K delta inhibitor, Zydelig (idelalisib), into first-line use in leukemia and lymphoma. Work on another asset, simtuzumab, was tabled after disappointing clinical findings in NASH and primary sclerosing cholangitis. And stopped due to lack of efficacy was a phase II/III study testing anti-MMP-9 antibody GS-5745 in ulcerative colitis. A phase II study of the compound in Crohn's disease also failed to show benefit.

Gilead has plenty of cash – $32.4 billion as of Dec. 31, 2016, compared to $26.2 billion a year earlier. The company, which generated $16.7 billion in operating cash flow last year, used $11 billion to repurchase 123 million shares of its stock and to pay cash dividends of $2.5 billion.

Pressed on the call for additional color on the company's appetite for deal flow to maintain its trajectory, John Milligan, Gilead's president and CEO, said "a desire and a need to have a right strategic fit for the company" was the driver for M&A and partnerships "much more so than the need for cash flow, because we feel very comfortable about where we are."

Gilead also is comfortable about the "opportunity to do some deals and add incremental R&D expense to get us back to levels commensurate with last year," Washington added in response to a question about the company's 2017 guidance of $3.1 billion to $3.4 billion in R&D expense.

In fact, Milligan acknowledged the onus is on Gilead to make a transformative move.

"We don't have a lot of things launching over the next few years," he said, citing the phase III HIV-1 integrase inhibitor, bictegravir, as a rare bright spot. Downward pressure on the company's non-HCV revenue base "makes it challenging for us to grow without some sort of acquisition in those areas. I'm not going to say exactly when that would pick up again. It will depend a little bit on where HCV stabilizes and it will depend quite a bit on the uptake of bictegravir."

'WE FIND IT HARD TO SEE MUCH UPSIDE'

The dogged focus on products within Gilead's comfort zone – most analysts previously factored bictegravir into revenue projections – is exactly what worries even the company's biggest fans. In public forums, Gilead business development officials have minced no words about the company's celebrated caution toward dealmaking. At an investor symposium last month, a company official participating in a roundtable discussion on financing of early stage companies observed that senior management – most of them seasoned scientists – were more comfortable looking at datasets than term sheets, characterizing efforts to move Gilead toward deals beyond its core competencies as "a battle."

Gilead became a darling of Wall Street thanks to its reputation for clinical excellence and commercial execution, but patience with its dillydally approach to decision-making is wearing thin. Leerink Partners LLC analyst Geoffrey Porges took a harsh tone in his earnings report, lowering the company's price target to $74 from $91 while maintaining a "market perform" rating.

"While Gilead's stock is compellingly valued, and has some optionality from capital deployment and their existing portfolio, we find it hard to see much upside from other multiple expansion or estimate revisions until HCV sales reach a floor (or a deal is announced)," Porges wrote. "The company's current risk is accentuated by challenges to their U.S. market sales from public insurance repeal or reform, from patent expiries over the next 18 months and from new and potentially disruptive competitors in their two leading therapeutic categories."

Although some analysts gave Gilead the benefit of the doubt on its HCV guidance, Porges did not fall into that camp.

"This guidance suggests a decline of 40-50 percent in HCV revenue in 2017, and management provided considerable information to substantiate the magnitude of the decline, most notably that they expect patient volume to decline by 35 percent, as well as a further 15 percent decline in treatment duration and price (combined into revenue yield per patient start)," he observed. "The decline is likely to be compounded by the challenge of comparison to the surge in patient volume that the company enjoyed in 2016 from the HCV treatment campaign in the U.S. VA, as well as initial catch-up treatment campaigns in parts of Europe and Japan."

As if that assessment didn't offer enough gloom, Porges added, "Although investors have recently regarded our view of Gilead's outlook as excessively pessimistic, we now find that given the uncertainty facing Gilead, we may still not have been cautious enough."

Cowen and Co. analyst Phil Nadeau was equally glum, lowering Gilead's price target to $90 from $100 and telegraphing his thoughts in an earnings note headlined "Urgency Grows For A Stronger Pipeline."

A discounted cash flow analysis suggested that Gilead remains undervalued, Nadeau pointed out, and he chided investors who were "giving the company little credit for having any business past the mid-2020s," pointing to a strong track record of creating shareholder value.

That said, "stocks tend not to go up as numbers come down," he added. "Management desperately needs to identify candidates for GILD's pipeline capable of changing the conversation among investors from 'How bad will it get?' to 'How good could it be?'"

In his earnings note, J.P. Morgan analyst Cory Kasimov acknowledged growing frustration "on the lack of a clearly articulated strategy," questioning whether Gilead's 2017 "cut to expectations shifts the narrative on the story. We suspect this will further intensify investor desire for M&A to drive growth in both the near and long term." Kasimov also slashed the company's price target to $82, from $96, but maintained an "overweight" rating on shares.

But Piper Jaffray's Joshua Schimmer showed solid support for Gilead, albeit masked in a note titled, "The Further You Fall, The Closer You Are To The Bottom." He argued that revenues from the HIV franchise – combined, fingers crossed, with M&A – eventually will offset HCV erosion, even if Gilead can't exactly say when that might occur. Although he also pushed the company's price target to $95, from $102, Schimmer maintained that Gilead offered "considerable upside" as "a 'deep value' stock which we believe is close to the floor, with a ~3.5 percent dividend yield now."

Schimmer also was sympathetic to a challenge facing Gilead that has, so far, eluded most biopharmas: the financial repercussions of bringing curative drugs to market.

"Given the dynamics of the cure market, it is somewhat understandable that the company has a bunch of question marks in its financial projections," Schimmer wrote in his earnings note. "That said, not even hazarding a guess as to when stabilization may occur and not having made stronger efforts to bolster its weak pipeline and portfolio over the past few years are less understandable. But . . . we persist – because it's clear to us this 'growth math' has a number of strategic solutions, even if the company takes longer than we all would have liked to get the answers."

Evidently, the company was sufficiently happy with management's answers to award top executives more than $5 million in 2016 bonuses. Gilead disclosed the awards, based on individual performance and the company's attainment of financial and non-financial objectives, in an SEC filing. According to the 8-K, Milligan is set to receive a 2016 bonus of $2.61 million while Washington's bonus was stated as $938,000. Norbert Bischofberger, executive vice president of R&D and chief scientific officer, is set to receive a 2016 bonus of $1.18 million and Gregg Alton, executive vice president of corporate and medical affairs, $945,000.

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