Who Had the Better Quarter: Gilead Sciences or Amgen?

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It's a battle between biotech behemoths in this episode of The Motley Fool's Industry Focus: Healthcare podcast. In one corner is Gilead Sciences (NASDAQ: GILD), a leader in HIV drugs that's knee-deep in efforts to offset dwindling hepatitis C drug revenue. In the other corner is Amgen (NASDAQ: AMGN), a biopharma facing stiff headwinds from biosimilar competition.

Is one of these companies executing on plans to kick-start sales better than the other? In this week's podcast, analyst Shannon Jones is joined by Fool.com contributor Todd Campbell to dissect each company's financials, the risks ahead, and what to watch next.

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To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on May 15, 2019.

Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, May the 15th, and we're talking healthcare. I'm your host, Shannon Jones, and I am joined via Skype by healthcare guru Todd Campbell. Todd, how are you doing?

Todd Campbell: I'm doing great, Shannon! Thanks for having me back on! Before we dive into the meat of the matter, I just want to give a quick shout out to the inaugural class of students at the University of New Hampshire, who suffered through the entire semester with me learning how to talk stocks. It was a great experience. I think that we've got some future fantastic Foolish investors coming out of that course.

Jones: That's so exciting! I mean, it's awesome to have the opportunity to sit under the tutelage of Todd Campbell. I can say that because I learn so much every single week every time we do this show from you, Todd. Awesome job to you and to them for going through the course. Hope to see a lot of these newer Fools on our community discussion board. Would love to start picking their brains, too. But I'm excited for this week's show, Todd! We're continuing on in our series, and specifically our series on earnings. Today is the battle of the big biotechs. That's right, who had the better quarter: Gilead Sciences or Amgen? We're going to dive into all of that today.

But Todd, how about we kick things off with Gilead, ticker GILD? Todd, this has been a company that's really been attempting to right the ship in so many ways. They've suffered from years of declining sales, mostly at the hands of a declining hepatitis C franchise. But, they reported first-quarter earnings earlier this month. The company, now under new leadership, has been guiding to return to growth happening in 2019. Todd, are we finally seeing some signs of life here?

Campbell: We had so much fun doing that show, right, Shannon, with Teladoc and Tandem a couple of weeks back, talking about the battle over earnings. On today's show, we've got two very, very different companies. We're not talking about disruptors currently, we're talking about companies that are some of the biggest in biopharma that are, as you said, trying to get back on the right track.

Gilead Sciences has been, definitely, a stock that has tested investors' patience over the last few years. As you mentioned, became one of the most talked about companies in biopharma in 2014, when it launched Sovaldi and Harvoni, two hepatitis C drugs that just revolutionized care by delivering functional cure rates of over 90% in as little as eight weeks. And because they worked so well, and they're relatively high-priced drugs, Gilead Sciences' sales rocketed. Hepatitis C sales alone for them at a peak were running at a rate of about $20 billion per year, which is just amazing. But now, they've fallen to a rate of about $3.2 billion per year. And unsurprisingly, as a result, the company's lost about $85 billion in market capitalization over the last four years. Ouch!

And the big question there would be, well, is it finally safe to dip your toes in again on Gilead Sciences? I think that there were some signs for optimism in this first-quarter report, I mean, probably just starting right at the top line, with the fact that this was the first quarter in three years that they were actually able to report year-over-year revenue expansion. Their revenue grew 3.7% to about $5.3 billion.

Jones: I think it's funny, I don't think I've ever cheered for 3.7% growth, Todd, for any company. [laughs] But for those of us that have been following the Gilead story, 3.7% is huge for this company. Again, we talked about, they've had continuous declining sales. To see some revenue growth here is certainly an encouraging sign.

So yeah, 3.7% year over year to $5.3 billion. Really the drivers behind Q1 came down to HIV revenues and also Yescarta, the CAR-T therapy that they acquired when they purchased Kite Pharma. So those are really two of the bigger stories, I think, for Q1. What else did you see, Todd?

Campbell: Well, you see that sales nose-diving, right. The plane that is revenue is falling. And the question is, are they able to pull this nose back up? I think that that's what you're starting to see. Gilead Sciences made a name for itself in the 2000s on the back of those HIV drugs, not hepatitis C drugs. Those HIV drugs represent a very large proportion of the company's revenue now, proportionally, to the hepatitis C drugs, because, again, the hepatitis C drugs' sales have fallen markedly over the last couple of years as the addressable market has shrunk because they're so efficacious and more competitors have come into that marketplace. So a question I'd like to have answered here is, are we finally at a point where the strength that we're seeing in that HIV revenue can offset the declines in the hepatitis C revenue and start to lift that nose of that plane back up?

As you mentioned, very encouraging to see Yescarta sales more than double year over year in the quarter to $96 million. Yescarta, non-Hodgkin's lymphoma, CAR-T or gene therapy. Launched to fanfare, however, sales have been slow to materialize. Good to see that nearly half a billion run rate and growing for that drug.

Also shouldn't forget the other parts of the income statement. We did see an improvement year over year in net income for the company as well. Net income improving to $2.3 billion from $2 billion. And, non-GAAP earnings per share. Those improved to $1.76 from $1.48. If you look again at revenue growth, and then, of course, net income growth and earnings-per-share growth, that's what you want to see. You want to see those going in the right direction. And this is the first time in a long time we've seen that.

Jones: And Gilead also is welcoming in a new CEO. He started in March. That's Roche veteran Daniel O'Day. In many ways he's actually coming at a great time for Gilead Sciences. Had an opportunity to listen in on the earnings call. A couple of key things stood out to me. One is, he said expect more deals. I know that for Gilead investors, the story has been the same. When is Gilead going to make a transformative deal? Many thought that that was the Kite Pharma. Sales have been sluggish, of course, with their CAR-T therapy, but certainly picking up for Yescarta and continuing to pull ahead in terms of being a market leader. But, Daniel O'Day is saying expect more deals, not necessarily transformative deals, but more like bolt-on acquisitions, some licensing deals. He's got a background in oncology. For a lot of investors right now, is this the time that Gilead is now shifting and really becoming more of an oncology player? With even Kite right now, he announced he'll be looking for an additional CEO to run the Kite business and really build up the oncology franchise there. That'll be a huge area to watch.

Another thing he said that was really interesting to me, Todd, was that he really thinks, in both oncology and even in NASH, the fatty liver disease, he thinks combination therapies are really going to be the key drivers. So you can start to see where his strategy is going for moving this company forward. And all in all, I think it'll be really interesting to watch.

Campbell: Yeah. Coming from Roche and having a background in oncology, it's going to be very interesting to see how O'Day positions the company. Because if you look at Gilead Sciences, they've said for years, we want to be a much larger player in oncology. Yet they don't have checkpoint inhibitors. They don't have PARP inhibitors. They've skipped this big development that we saw in the industry in the last five years to jump to gene therapy. Will they continue to focus entirely on gene therapy? Or will some of those bolt-ons, the phase 2, phase 3 deals they were talking about on the conference call, will those be to try and fill out some of those other areas so that they can have more robust combination approaches? That's going to be very interesting to watch.

I thought one of the other things that was interesting that they mentioned on the conference call was the potential for KTE-X19. This is a second gene therapy that's come out of Kite. The potential for a filing of that with the FDA later this year for [relapsed/refractory B-precursor acute] lymphoblastic leukemia. If the data's good and they're able to get that filed, that drug could start contributing to sales next year as well.

It is disappointing, though, that the selonsertib trials in NASH, that was their most advanced NASH drug that was in clinical studies, those did fall short. But, offsetting that is potentially a much larger opportunity for filgotinib, the rheumatoid arthritis drug that they licensed from Galapagos. They already have positive phase 3 data in hand. They're going to present that to the European Union later this year. There are some encouraging signs as far as late-stage products that could be making it to market within the next 12 to 18 months.

Jones: And this quarter, even though it had a lot of bright spots, still some signs or maybe question marks to keep an eye on. You've got generic competition in Europe for Truvada, also generic competition for Ranexa and Letairis. And really, when you think about their HIV franchise, and it has been a strong driver in this particular quarter, it's really still coming on the backs of their older HIV products. You've got some cannibalization happening there. And ultimately, at the end of the day, I think what investors want to see is just continued stabilization of their HIV franchise. Again, not expecting this to be any sort of growth driver for them, but at least wanting to see some stabilization moving forward. And even though we did see Yescarta, as you mentioned, double year over year, it's still been a sluggish start. It won't necessarily be the needle-pusher that many were hoping it would be, at least not yet. But with some candidates in the pipeline, like you mentioned, I do think that there are a lot of more encouraging signs than discouraging signs for Gilead in this quarter.

Campbell: Right. If you think about how much is still at risk in revenue. They did $5.3 billion in revenue in the first quarter. Hepatitis C contributed $790 million. Sales are still going to drop in hepatitis C. But it's not nearly as big a headwind to the potential upside for these other HIV drugs, and hopefully these other gene therapies as they continue to grow. You mentioned the generic competition for those other two drugs. I think combined, they have another $300 million. So maybe you say, "OK, well, we've got about a billion of the $5.3 billion in revenue that's under threat."

​Jones: Great points there, Todd. So a lot to watch, a lot to keep an eye on. And again for our listeners out there, that's Gilead Sciences, ticker GILD. I had a listener ask if I could repeat the ticker symbols twice, so I'm going to try to remember to do that. All right, that's Gilead Sciences.

Let's turn our attention to the other big contender. That's the biotech behemoth Amgen, ticker AMGN. For Amgen, just like you mentioned, Todd, this is very much a comeback story investors are hoping to see play out. This is another company that's had a lot of concern about generic competition as well. They reported their Q1 earnings at the end of April. Todd, how did they fare?

Campbell: Relatively flat year over year. They came in at $5.57 billion in revenue vs. $5.554 billion. Rounding error difference year over year. Operating income, though, did drop 9%. GAAP net income fell 14%. Non-GAAP earnings per share actually clipped up 3%, but a lot of that was because of how much they did in share buybacks last quarter. So, moving in the wrong direction on the bottom-line numbers, and flatlining on the top line.

Jones: I know all eyes on this particular quarter were on their migraine drug, Aimovig. Aimovig was the first of three companies to launch a new type of migraine prevention treatment. And really for investors, Aimovig has been, "OK, can this be the big growth driver that we've been waiting for?" At the end of 2018, they had over 150,000 patients who'd actually tried Aimovig, a majority of new migraine drug prescriptions that were filled last year. So the question for this quarter is really about, can Aimovig maintain its dominance and its market share? And we got our answer, Todd. Sales slid to $59 million from $95 million three months earlier. And this is really due to the fierce competition in this space from Eli Lilly and Teva Pharmaceuticals, both of which launched their own migraine drugs late last year. I know there's also a lingering question about Novartis' collaboration deal with this drug. But all in all, not what investors wanted to see, especially for a drug that many were hoping would be the next big growth driver.

Campbell: It still has a chance, Shannon, to be a really big, meaningful drug for this company. I mean, there are 4 million people that take preventative medication for migraine in the U.S. alone. The vast majority, historically, of those patients have discontinued therapy. So they're definitely looking for something that works better for them. I think that this is a changing landscape competitively, though. There are now multiple drugs that are targeting the same target here. You're going to be fighting over price, you're going to be fighting to get favorable treatment on some of these drug formularies to drive sales and volume. It'll be interesting to watch and see how that plays out throughout the rest of the course of the year. They did say on the conference call that their drug has 60% market share as far as prescription volume among this class of drugs. Perhaps that's encouraging.

Jones: Yeah. So, maybe still too early, but there were some good news also. Their cholesterol-reducing injection Repatha did see sales increase 15% to $141 million. Their bispecific antibody, BiTE, jumped 41% to $69 million. Their osteoporosis drug went up 20% to $592 million. In addition, too, Enbrel, Amgen's best-selling drug, rose just lightly, 4% to $1.15 billion. So there were some bright spots. I think, though overall, if there were a couple of things that may be pink flags -- I wouldn't call them red flags, but pink flags -- with Repatha, Prolia, and Kyprolis, they did grow double digits, but they actually fell quarter over quarter. And then, their calcium-reduction treatment, Sensipar, did get hit pretty hard by generic competition, driving sales 57% lower to $213 million. Granted, flat overall in terms of growth, but kind of a mixed quarter when it comes down to the individual drugs.

Campbell: Yeah. Investors who are probably reading through the press release and listening to the earnings conference call, they might be asking themselves a question about Repatha. So probably good to unpack that a little bit for people. Repatha worldwide unit growth soared. It was up 81% year over year. Ninety percent unit growth in the U.S. But revenue only rose 15% to $141 million. People might not know why that is. So just as a refresher, Repatha, when it launched, launched up against another drug called Praluent, which is made by a competitor. They both launched to the market with price tags above $10,000 per year. Since then, the price has continued to drop as they've battled out for market share and tried to juice and get volume and win reimbursement with payers. So, yes, you're finally at a point now where volume for Repatha is surging, but you're not getting that same percentage increase in revenue because they are cutting the price very dramatically. Overall, I think that's fine. I mean, this is a huge marketplace. You want to establish yourself in it and win meaningful market share. But that may be something that people had on their mind.

The other thing I wanted to point out is, if you look at Amgen's various drugs in its product lineup, you'll notice a lot of really old drugs, drugs that have been around a long time. Enbrel, Neulasta, Neupogen, Neupogen. These drugs are getting long in the tooth. They've lost patent protection. Biosimilars are getting approved now that are starting to chip away at market share, particularly in Europe -- which we've talked about on the show, Europe's been a little bit ahead of the U.S. as far as embracing biosimilars, and that remains a big threat to a significant amount of revenue at Amgen that they're trying to navigate. One of the ways that they have been hoping to try and offset that biosimilar threat is, if you can't beat them, join them. They came out with their own biosimilars. They've launched a couple now. And they did announce in the first quarter sales of $55 million for those biosimilars. So now they're at a run rate of $200 million per year, and it's very early innings for those biosimilars. So I wanted to call that out, make sure people are aware of that.

Jones: Just to tag onto that, really 2019 for Amgen, they talked about in the conference call just how much biosimilars will be one of their biggest growth drivers moving forward. They have a potential for some to launch later on this year. Biosimilars, again, to your point, if you can't beat them, go ahead and join them. That's really what they're going after there.

Campbell: Yeah. The one worry, the one problem, is that they have way more money exposed to the biosimilar threat than they're likely to generate in biosimilar revenue at this point. Just across Enbrel, Neulasta, Neupogen, and Aranesp, which all now face generic competition in one way or another somewhere in the world, that's $2.8 billion of their quarterly revenue that theoretically is at risk -- about half of their quarterly revenue at risk. That's something to be aware of. There's a big headwind there that they're trying to navigate their way around.

Jones: Yeah. For the quarter, Amgen did end up tightening their guidance for 2019. They're still at the high end of their previously guided range, with revenue expected to reach between $22 billion and $22.9 billion. They did lower their EPS range, though, by about $0.02, and it's $11.68 per share to $12.73 per share moving forward.

I will say, another area that I'll just be watching, we've got ASCO, the American Society for Clinical Oncology, their big annual conference coming up in June. Amgen is expected to release data actually before that, when abstracts drop, I believe this week, which I'll be keeping an eye on. But they've got some bispecific antibodies that many investors are also going to be watching in addition to the biosimilar story, too.

Campbell: Absolutely. The question becomes, is this investable? Is this an investable moment? There's a lot of potential headline risk-reward over the course of the next four or five weeks because of ASCO. People need to be aware. That means we've got AMG 420 that they're going to present data on at the beginning of June. They're going to present data on AMG 212 early next month. They're also going to present the first data on a new drug called AMG 510, which could be a very, very interesting drug. Write that one down, AMG 510, to see how that data comes out. So yeah, there's headline risk-reward here that investors need to be aware of that could create more volatility in what is otherwise historically not as volatile a stock because of its size.

Jones: Yeah, very good point! I think this is true, probably, of all the major biotechs right now, they've really entered just into a period of sluggishness. You've really not seen the innovation and the growth drivers over the past few years. So investors are really hungry to see that among Amgen, Gilead, Biogen, even Celgene, who's in the process of being acquired. But all in all, there's a lot to watch, especially for Amgen right now.

Todd, if you had to vote right now, who would you say had the better quarter?

Campbell: It's a toughie because there are things about each of these companies' quarters that I didn't like. But I'm going to give it to Gilead Sciences because all of their numbers went in the right direction. [laughs] Now, you could argue, "Todd, their bottom line benefited from a lower tax rate." It did. You have to keep that in mind. But they're paying down debt. Their interest expense dropped. That helped the cause a little bit. And because their cost of goods sold came down, increases in SG&A and R&D expenses were offset. OPEX and COGS grew about the same rate as revenue. And the fact that they did not cut their guidance. [laughs] So, you have a few different things there that I like more than I like Amgen. Amgen, again, you had numbers going in the wrong direction, and you had the cut in guidance. So I think that I'm going to give the edge to Gilead.

And then, as far as the rest of the year playing out, it's really going to be data dependent. Investors should recognize that there's news that can be coming on both of these companies that could shift them one way or the other. Investors probably ought to know, too, that Gilead's dividend yield currently is about 3.9%. I think Amgen's is about 3.5%.

Jones: Yeah, that sounds about right there. I think I will agree with you here, Todd! You've got shrinking top and bottom lines for Amgen. But here we are, celebrating that 3.7% top-line growth for Gilead Sciences. I'll take it, especially for a company that has desperately needed some good news moving forward. Of course, one quarter is too short to make a decision. We'll continue to watch this long-term story play out for both, and keep all of our listeners up to date.

But that'll do it for this week's Industry Focus: Healthcare show! Thanks so much for tuning in! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is being mixed by Austin Morgan. For Todd Campbell, I'm Shannon Jones. Thanks for listening and Fool on!

Shannon Jones has no position in any of the stocks mentioned. Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends BIIB, CELG, Gilead Sciences, and TDOC. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy.