Ebb & Flow

Gilead (GILD) gave the Street another upside surprise for the first quarter, but the EPS uplift looks to have come from less spending on R&D, rather than unexpectedly high revenue. Indeed, while GILD's quarterly revenue exceeded $1 billion for the first time, it also matched the consensus estimates.

Whatever the reason, GILD was up $3.97 to $82.39 on the week, adding almost $2 billion to its market cap to reach $38.3 billion (see "Upside Surprises").

The GAAP EPS came in at $0.85, while the non-GAAP figure was $0.93. The consensus EPS estimate was $0.79.

Punk Ziegel analyst Sharon Seiler chalked up the EPS discrepancy to relatively slim operating expenses. "Product sales and total revenues were in line with our expectations, but operating expenses were significantly lower than we had projected," she said in a note.

Seiler noted the R&D figure came in 16% below her expectations at $109 million, which was slightly less than the $111 million recorded in 4Q06 (see "Analyst Picks & Changes" A23).

Indeed, GILD spent 11% of its revenue on R&D, much less than Amgen (AMGN) and Genentech (DNA), which spent 32% and 21%, respectively, in their most recent quarters.

For 2006, GILD's R&D spend was 13% of revenue, and it was 14% in 2005. But the company's 2007 guidance indicates it expects to bump up its outlay. GILD is projecting $570-$590 million for R&D for the year, implying an average of $154-$160 million a quarter for the remainder of the year.

The boost would raise its R&D to about 15% of revenues for the year, based on the company's guidance.

Product sales came in at $840 million, and the company provided guidance of $3.4-$3.5 billion in product sales for FY07, which averages to $853-$887 million a quarter going forward.

GILD also showed a substantial difference between GAAP and non-GAAP EPS in the first quarter. In its

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