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Morningstar | Gilead Top Executive Transition Continues with CEO Milligan's Departure: 2Q Results Support Our FVE

Gilead reported solid second-quarter results, reflecting both underlying strength in the HIV business and stabilization in hepatitis C, and we don't expect to make any significant changes to our $82 per share fair value estimate. Alongside the earnings announcement, the firm announced that CEO John Milligan is stepping down at the end of the year, along with current board Chairman (and former CEO) John Martin. Milligan has spent 28 years at Gilead but has only been in the CEO role since March 2016. This follows on Chief Scientific Officer Norbert Bischofberger's departure at the end of April. We think the timing is logical, as it gives the firm the opportunity for a fresh management team to enter at a time when massive revenue headwinds from the HCV franchise are abating. With guidance for the full year largely maintained, we don't expect to make any significant changes to our valuation model, other than correcting for a slightly lower tax rate and diving deeper into the potential of the firm's NASH pipeline, which should have pivotal data in advanced fibrosis and cirrhosis patients in the first half of 2019 for selonsertib as well as phase 2 data for various combination regimens in the second half of 2019. We think the firm's next-generation HIV therapies, stabilizing HCV business, and potential for growth in new areas from oncology (cell therapy) to NASH support a wide moat.

While total revenue fell 21% from the second quarter of 2017 to $5.6 billion, HIV sales grew 13% to $3.7 billion. This was partly due to a slightly higher percentage of sales from private payers (at higher price points) than government payers, but also due to the strong launch of new combination regimen Biktarvy in the U.S., which saw $183 million in sales in its first full quarter. Patients are largely switching from older Gilead regimens, but also Glaxo's Triumeq and Tivicay. While Glaxo recently reported solid data from its two-drug combination of lamivudine and Tivicay (dolutegravir) in treatment-naïve patients, we think Biktarvy's strong efficacy and safety profile, and the entrenched nature of three-drug regimens, will allow for Biktarvy to continue to launch strongly. In HCV, revenue fell to $1 billion, but this was only a 4% decline sequentially, reflecting an environment of stabilizing price and market share. Yescarta sales of $68 million are growing steadily as the U.S. launch continues; we're maintaining our estimates for the drug, which we believe has potential in broader blood cancer indications and potentially in combination with checkpoint inhibitors like Roche's Tecentriq.