There is no holding back Gilead Sciences’ (GILD) hepatitis C virus (:HCV) drug Sovaldi. The drug continued its exceptional performance in the second quarter of 2014, helping the company to beat the Zacks Consensus Estimate on both revenues and earnings.

The biopharmaceutical company’s second quarter adjusted earnings (including stock based compensation expenses) of $2.32 per share trumped the Zacks Consensus Estimate of $1.61. Moreover, second quarter 2014 earnings were way above the year-ago figure of 48 cents per share.

Gilead Sciences, Inc - Earnings Surprise | FindTheBest

Including one-time items, the company reported second quarter earnings of $2.20 per share, well above the year-ago earnings of 46 cents.

Sovaldi’s strong sales helped Gilead record total revenues of $6.53 billion, way above the year-ago figure of $2.77 billion. Quarterly revenues easily surpassed the Zacks Consensus Estimate of $5.8 billion.

Sovaldi Steals the Show for Second Quarter in a Row

With Sovaldi registering sales in excess of $3.4 billion ($3.48 billion to be exact) in the second quarter of 2014 it wasn’t surprising that product sales more than doubled (141% growth) to $6.41 billion. Sovaldi sales in the second quarter climbed 53.3% sequentially. Though Sovaldi sales outshone the rest, other anti-viral products, such as HIV treatments Complera/Eviplera (up 59% to $299.5 million) and Stribild (launched in the U.S. and the EU in Aug 2012 and May 2013 respectively) performed very well. Stribild sales came in at $269.5 million, up 25.2% sequentially. Sales of older HIV drugs like Truvada, Viread and Atripla were mixed. Truvada sales were flat at to $806.6 million, Viread sales improved 4% to $260.7 million while Atripla sales declined 7% to $870.7 million.

Antiviral product sales for the quarter registered massive growth of 160.2% to $6.01 billion on the strength of Sovaldi. The U.S. market was the chief beneficiary of Sovaldi’s strong sales for the second consecutive quarter. The HCV treatment registered second quarter sales of $3.03 billion in the U.S., up 44.3% sequentially. The drug was approved by the FDA in Dec 2013. Consequently, the U.S. market notched up antiviral product sales of $4.52 billion, up 229%. Europe contributed $1.23 billion (up 63.1%) to antiviral product sales. The EU approval of Sovaldi was gained in Jan 2014 and the drug registered European sales of $400.2 million in the second quarter of 2014. Other products including Letairis, Ranexa and AmBisome recorded sales of $144.7 million (up 13%), $122 million (up 14%) and $94.8 million (up 26.2%), respectively.

On the operational front (including stock-based compensation expenses), operating margin improved to 70.6% from 42.9% a year ago. Research & development (R&D) expenses climbed 12.9% to $578.6 million in the second quarter of 2014 while selling, general and administrative (SG&A) expenses surged 51.4% to $613.2 million. The rise in R&D expenses was primarily driven by Gilead’s efforts to develop its HIV and oncology pipelines. SG&A expenses shot up because of Gilead’s expansion efforts. Costs associated with the marketing of Sovaldi in the U.S. and pre-launch expenses associated with oncology drug Zydelig (idelalisib) also pushed up SG&A expenses.

Zydelig Cleared by FDA

Gilead’s product portfolio was further strengthened when the FDA approved Zydelig (idelalisib) for treating three cancer forms. The FDA cleared Zydelig in combination with Roche’s (RHHBY) Rituxan (rituximab) for treating patients with relapsed chronic lymphocytic leukemia. Zydelig is also approved as monotherapy for treating patients with relapsed follicular B-cell non-Hodgkin lymphoma and small lymphocytic lymphoma who have received at least two previous systemic therapies.

2014 Guidance

For the first time Gilead provided net product sales guidance including the impact of Sovaldi sales. Gilead expects product sales in the range of $21 billion to $23 billion. The Zacks Consensus Estimate of $22.45 billion is on the higher end of the guidance range. Previously Gilead had anticipated product sales in the range of $11.3 billion to $11.5 billion (excluding Sovaldi sales). We expect Gilead’s stock price to climb following the strong earnings report, a guidance inclusive of Sovaldi and the FDA approval of Zydelig.

Adjusted product gross margin for 2014 is now projected in the range of 85% to 88% (old guidance: 75% to 77%). Adjusted effective tax rate is now pegged in the range of $17.5% to 20.5% (previous guidance: $28% to $29%).

R&D expenses (excluding stock-based compensation expenses and other special items) are projected in the range of $2.3 billion to $2.4 billion (old guidance: $2.2 billion to $2.3 billion). The increase takes into account Gilead’s efforts to develop its pipeline. SG&A expenses are forecast in the range of $2.3 billion to $2.4 billion (old guidance: $2.1billion to $2.2 billion). Gilead’s efforts to expand its commercial infrastructure in Asia and Europe have led to the increased guidance.

Our View

One cannot but be impressed by Sovaldi’s performance in the second quarter of 2014. We expect Sovaldi sales to continue growing through 2014. The product’s outstanding performance for the second straight quarter should go a long way to justify its high price tag. The drug costs $84,000 for a 12-week treatment period in the U.S. According to Gilead, approximately 70,000 patients have been treated with Sovaldi in the U.S. since its launch late last year. Products like Complera/Eviplera and Stribild should also continue performing well.

Focus will also be on Gilead’s pipeline. After Sovaldi, Gilead is looking to get its next HCV treatment, a fixed dose combination of ledipasvir and Sovaldi, approved in the U.S. The FDA will decide on the approval status of this cocktail treatment by Oct 10. The month is crucial as it is likely to see a couple more of FDA decisions on Gilead candidates. While the U.S. regulatory body will decide on cobicistat’s regulatory status by Oct 3, it will decide on elvitegravir by Oct 4.

Gilead currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the healthcare space include Biogen Idec (BIIB) and The Medicines Company (MDCO). Both stocks sport a Zacks Rank # 1 (Strong Buy).

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