Gilead Could Miss Earnings (Hint: Watch Drug Sales)

Gilead Sciences, Inc. GILD is set to report fourth-quarter 2014 results on Feb 3 after the market closes. Last quarter, the company delivered a positive earnings surprise of 9.15%. Let's see how things are shaping up for this announcement.

Sovaldi And Harvoni In Focus

Gilead's blockbuster hepatitis C virus (HCV) treatment, Sovaldi, is expected to contribute meaningfully to the company's top line in the fourth quarter, as it has done so since its launch in the U.S. in Dec 2013. According to Gilead, approximately 117,000 patients have been treated with Sovaldi in the U.S. since its launch. Its new HCV drug, Harvoni (approved in Oct 2014) was also received well. Furthermore, Zydelig newly approved in the U.S. for treating three cancer forms — chronic lymphocytic leukemia (CLL), follicular B-cell non-Hodgkin lymphoma and small lymphocytic lymphoma – will also contribute to Gilead's top line.

However, we are concerned about the future of the HCV products given the Express Scripts-AbbVie (ESRX/ABBV) deal. Express Scripts has added AbbVie's lower priced Viekira Pak to its formulary, which will be the exclusive option for genotype 1 HCV patients from Jan 1, 2015. Express Scripts' decision to choose lower-priced Viekira Pak over other expensive HCV drugs has triggered concerns about pricing pressure on Sovaldi and Harvoni.

Meanwhile, for Sovaldi and Harvoni, Gilead has entered into agreements with other pharmacy benefit managers and health care benefit companies including Aetna which will result in lower pricing for the HCV drugs for Aetna customers.

We believe that investor focus will remain on updates on the performance of Sovaldi, Harvoni and Zydelig. Investors are also looking forward to the company's outlook for 2015, which is expected to be revealed along with the earnings release.

Earnings Whispers?

Our proven model does not conclusively show that Gilead is likely to beat the Zacks Consensus Estimate in the fourth quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. Unfortunately, this is not the case here, as elaborated below.

Negative Zacks ESP: Earnings ESP for Gilead is -3.97%. This is because the Most Accurate estimate stands at $2.18 while the Zacks Consensus Estimate is higher at $2.27.

Zacks Rank: Gilead's Zacks Rank #4 (Sell) decreases the predictive power of the earnings ESP. This when combined with a negative ESP makes an earnings beat difficult.

Stocks That Warrant a Look

Here are some health care stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

Actavis ACT has an earnings ESP of +4.38% and carries a Zacks Rank #3. It is expected to report fourth-quarter results on Feb 18.

Acorda Therapeutics, Inc. ACOR has an Earnings ESP of +106.67% and a Zacks Rank #3. The company is expected to release results on Feb 12.

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