Gilead Sciences is Among the Best Stocks in the Post-Corona Era, According to Analysts

Gilead is for some analysts the best US stock to buy right now. We applaud Gilead’s efforts to accelerate the development of remdesivir (Veklury), which has received orders from the U.S. government and the European Union.

The company has also introduced some promising new HIV drugs, which have already gained significant market share and are considered the No. 1 HIV treatment options in the U.S.

However, we are concerned about the financial benefit of Veklury in light of the $1 billion the company is spending on the drug development process, the 1.5 million doses that have been donated, and the likelihood that several vaccines will soon be approved.

In addition, the company’s reliance on its HIV therapies (nearly 80% of revenue) and weak product pipeline has forced it into pricey partnerships in an effort to expand its immune-oncology portfolio.

We expect continued investor skepticism of Veklury and reliance on external innovation for years to come.

RECENT DEVELOPMENTS

Gilead reported fiscal 2Q20 revenue results of $5.14 billion, down 9. The operating margin was 38.8% compared to 50.4%.

Non-GAAP R&D expense of $1.2 billion was 23% of revenue and up 19% from the prior year. Adjusted EPS declined 35% to $1.11, $0.34 below the consensus estimate.

For the first half, revenue was $10.69 billion, down 2.5% from the prior year. Operating income was 44.5%, down 590 basis points and non-GAAP R&D expense of $2.2 billion was 20% of revenue and up to $13.6%.

Management indicated that R&D expense increased due to higher clinical trial and manufacturing ramp-up related to Veklury.

Total product sales were down 9.6% to $5.1 million in the quarter and down 2.5% for the half. Fewer patient visits impacted sales during the pandemic, drug hoarding during 1Q as the pandemic escalated, the introduction of generics, and higher revenue in 2019 due to a $160 million favorable European rebate adjustment.

The declines in 2020 revenue were partially offset by growth in the company’s HIV products. Gilead cures three disease categories: HIV (79% of revenue), Hepatitis C (9%), and Cancer (3%). We note that the other represents 9%. Sales in the HIV business declined 1% to $4.0 billion in the second quarter but were up 6% to $8.1 billion for the second half. 

European rebate management reported that Biktarvy, considered the No. 1 HIV treatment in the U.S., achieved a sales increase of 44% and gained market share.

During this time, Descovy, a complementary HIV drug, reported a 16% increase in revenue and an established market share of 43%. In the Hepatitis C segment, sales decreased 47% to $448 million in the 2Q and were down 28% for the first half.

COVID-19, a lower average net selling price, and the rebate in Europe impacted sales. Sales increased 19% in the quarter to $174 million and 24% in the second half to $334 million for the cancer segment. Recent developments regarding Gilead’s remdesivir (Veklury) are summarized below:

– Veklury was granted FDA emergency use authorization (EUA) on May 1 to treat COVID-19. The EUA will facilitate broader use of the drug to treat severely affected patients; however, Veklury remains an investigational drug in the U.S. In May 2020, the drug was granted regulatory approval for the treatment of patients with severe COVID-19 in Japan, and in July 2020, the drug was approved for use in the European Union.

– The EUA issued by the FDA is based on the results of two Phase 3 clinical trials – one conducted by the National Institute of Allergy and Infectious Diseases (NIAID) and one by Gilead. However, several researchers criticize the clinical trials citing that the patient demographics in the study did not reflect the demographics of the disease.

-In June 2020, Gilead donated its entire initial supply of 1.5 million doses of Veklury. Subsequent therapies will be priced at $390 per vial for governments of developed countries and $520 per vial for U.S. private insurers. Gilead believes the pricing was set well below the value it provides. Gilead has also entered into agreements with generic manufacturers to deliver Veklury to developing countries at a substantially lower cost.

-In June 2020, Gilead entered into an agreement with the U.S. Department of Health and Human Services for the purchase of Veklury. In July, the company entered a deal that enables the European Commission to purchase Veklury for allocation to the European Union member states and the U.K. Recent developments in Gilead’s immune-oncology portfolio are summarized below:

– The FDA has granted accelerated approval of Tecartus, a cell therapy to treat relapsed mantle cell lymphoma.

– In April, Gilead acquired Forty-Seven for approximately $4.9 billion, gaining rights to drug candidate magrolimab, which is currently in Phase 1b/2 clinical studies as a treatment for several hematological cancers.

– In May, Gilead entered into an agreement with Arcus Biosciences, Inc., which is building a portfolio of investigative products for cancer therapies. Under the agreement, Gilead made an upfront payment of $175 million and acquired 6 million shares of Arcus common stock for $200 million.

-Gilead and Kite Pharma entered into two agreements during the quarter. The second, with Teneobio, Inc, is to collaborate on cell therapies in multiple myelomas.

– In June 2020, Gilead acquired 49.9% of Pionyr Immunotherapeutics, Inc., a privately held company in the field of immune-oncology, for a $275 million cash payment. -In July 2020, Gilead entered into a transaction with Tizona Therapeutics, Inc., cancer immunotherapies. Gilead will pay $300 million in cash to receive a 49.9% interest in Tizona. The transaction is expected to close in 3Q20.

Management revised its full-year guidance initially provided in February 2020. Sales in 2020 are expected to be $23.0 – $25.0 billion, $21.8 – $22.2 billion. A mid-teens percentage growth is expected in R&D expenses, up from mid-single-digit growth.

EARNINGS & GROWTH ANALYSIS

We are revising our adjusted $6.44 from $6.15 and $6.57 from $6.40 to reflect the lower end of management’s guidance. We are basing our estimate on the momentum of Gilead’s product portfolio but remain wary of a COVID vaccine approval in the near future. Our estimates assume a decline in earnings of 3% this year and earnings growth of 2% next year.

FINANCIAL STRENGTH

Long-term debt was $21.1 billion, down from $22.1 54% up from 50% maturities are $2 2020 and April 2021. Gilead pays an annualized dividend of $2.72 for 2020 and $2.90 for 2021.

MANAGEMENT & RISKS

In March 2019, Daniel O’Day joined Gilead Sciences as chairman of the board of directors and CEO. Prior to Gilead, Daniel served as the CEO of Roche Pharmaceuticals. During his three decades at Roche, Mr. O’Day held executive positions in North America, Europe and Asia.

He has also served as a member of Roche’s Corporate Executive Committee, as well as on the boards of Genentech, Flatiron Health, and Foundation Medicine. HIV market, with a penetration of over 50%; Gilead.

The company has exposed themselves to political risk as it has been accused over the years of putting corporate profitability over the health and collective well-being of society.

Examples include delaying an effective HIV drug five years so their existing drug could maintain its monopoly and seeking to end their compassionate use program for remdesivir, a current therapy for COVID-19, by restricting access and driving up prices.

Gilead’s HIV and Hepatitis C drugs are subject to price risk and reimbursement pressures in major markets.

Among the larger customers are government institutions, such as the Veterans Administration and state agencies, that negotiate pricing with the company.

The company faces legal risks, including a patent fight concerning Kite Pharma, the immunotherapy company it bought for $11.9 billion in 2017. Gilead has since had to write down much of the purchase price.

COMPANY DESCRIPTION

Gilead Sciences is a California-based biopharmaceutical HIV, hepatitis B, hepatitis C, and certain cancers. In June 2020, it was announced that the United States Department of Health and Human Services had agreed to buy 500,000 courses of treatments (2.5 million doses) of remdesivir (Teklury) for the treatment of COVID-19. Founded in 1987, 11,800 people.

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