Gilead Q2 Mystery: Purchase of Less-Efficient CVT Made It a More Efficient Company

Gilead continues to astonish: If you remove transaction and restructuring costs, the company's acquisition of CV Therapeutics has actually made it even more efficient than it was before, according to its its Q2 2009 results.

That's unexpected because CVT was an incredibly inefficient producer of its own revenues. So how did Gilead do it? Revenues were $1.6 billion, up 29 percent; net income was $571 million, up 31 percent. Those numbers include CVT, hence the big leaps.

BNET has previously argued that Gilead's diversification away from specialist HIV drugs into the cardiovascular area might ruin its famed operating leverage. At first glance, the last quarter confirmed the suspicion: The revenue yield on every $1 it spends on sales and admin declined to $6.30, lower than it's been since 2007 (but still higher than every other company in the U.S.).

Take out the $48 million in restructuring costs from the CVT buy, however, and that yield pops up to $7.73 -- higher than it's ever been.

This is a surprise. CVT alone had revenues of $154 million last year on sales and admin expenses of $142 million, giving it a truly lousy yield of $1.09. By all accounts, CVT should have made Gilead a less efficient company. But the opposite appears to have happened.

There's a caveat here -- one-time charges can hide a multitude of sins. The real challenge is to maintain margins going forward and not become a bloated big pharma company with a sprawling portfolio. At least one analyst was already thinking about that:

Geoff Porges â€" Sanford Bernstein: John and Robin, you've got a lot of moving parts here -- Atripla, the next triple Truvada, the quad, patent expiry for Sustiva--how should we think about margins going forward? You had a bit of a trend down here. You think that you can sustain margins, particularly operating margins at the current level or around the current level as you go through all of these transitions?
CFO Robin Washington: Given relative to our overall guidance, we do factor in margin as you know, but the more we sell of Atripla, it does create an overall drag on our margins, but we focus operationally on our core margin exclusive of Atripla or the Sustiva component of Atripla as well as Tamiflu, so it's something that we watch and monitor very closely. Clearly, if you look at second half 2009, we're impacted by the fact that we are integrating two companies, so we've got infrastructure in place for two companies that will continue to work through. The CPT impact on our overall EPS, if you look at it operationally, was about a penny, so feel pretty comfortable that we can maintain our operating margins overall going forward.
We'll see.