NEW YORK (
) -- A year ago, investors were griping that
(GILD - Get Report)
faced an enormous drug patent "cliff," wasn't returning adequate cash to shareholders and suffered from a lackluster research pipeline. What a difference one year can make. Gilead Sciences' HIV cash cow still produces a lot of milk and I wish management would pay a dividend, but the pipeline has advanced with astonishing speed.
Last week, the company reported second-quarter earnings of $767 million, or 99 cents per share -- topping the Street's consensus estimate. As an investor, I like to focus on free cashflow (FCF) -- the cash generated from operations less any capital expenditures -- as the most important measure of a company's health. Gilead reported $1.3 billion in operating cash flow during the quarter. (The company's capital expenditures are usually modest, but haven't been released yet.) Even after adjusting for the collection of $460 million in accounts receivable from Spain and increased R&D expenses, Gilead's business remains solid.
Wall Street has three primary concerns with Gilead's HIV franchise. First is the question of whether weak economic conditions will erode the company's dominance, through reduced governmental purchases, increased pricing pressure or a shift towards generics.
On its investor conference call, Gilead management reported improved purchases by the state-managed AIDS Drug Assistance Program (ADAP), a government-funded program that provides antiretroviral drugs to qualified low-income patients. Wait times for access to therapy -- a measure of funding adequacy -- have declined substantially from levels reached during the global financial crisis. ADAP purchases are often lumpy, so this could be a double-edged sword in the second half of the year, but there is no indication that the government has any interest in de-prioritizing this important program.
Pricing will continue to be an issue, particularly outside the U.S., but Gilead has faced no major cuts recently. Nonetheless, investors should probably expect flat pricing globally over the intermediate-term. However, since Gilead's drugs are relatively inexpensive and dramatically effective, drastic price cuts are unlikely.
My checks with physicians and payors continue to suggest limited interest in moving away from fixed dose combination (FDC) therapies. Reducing the pill burden in HIV meaningfully improves compliance, which results in less disease resistance and a reduced public health threat. I don't think the medical community would tolerate a return to multiple pills, even once per day.