The most important question you can ask about the typical big drugmaker is whether its pipeline will...
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Gerlach Sees Growth at Gilead
06/05/2019 5:00 am EST
Drug development is an uncertain enterprise. The rewards can be great, but failure is the most typical outcome, cautions growth stock expert Doug Gerlach, editor of Investor Advisory Service.
Gilead Sciences (GILD) has endured a string of setbacks, some due to bad luck and others self-inflicted. A new CEO looks to return the company to its old winning ways. Market expectations are low, which could offer a setup for investor success.
Gilead has led the charge in the highly successful war against HIV and AIDS. The company estimates that 89% of newly treated HIV patients in the U.S. currently receive a Gilead product.
In Europe, four of the top five most-prescribed regimens include a Gilead product. In total, its HIV medicines produced $14.6 billion in revenue last year, up 12% compared to 2017. 2019 estimates call for 10%-12% growth once again.
Today, a newly treated HIV patient is expected to have a life expectancy close to the healthy population average. Side effects and drug resistance have been largely eliminated. Where does the market go from here? It is becoming more difficult to innovate in the HIV space.
Gilead’s portfolio of HIV medications should carry it for another ten years or so, but the company will have to look elsewhere if it wants to thrive beyond the early 2030’s when its most innovative HIV drugs lose patent exclusivity.
Gilead has not had much success venturing beyond its expertise in HIV. It came close recently but bungled what should have been a windfall success.
In 2011 Gilead purchased Pharmasset for $11 billion, acquiring a Phase II molecule which would ultimately prove a groundbreaking, curative treatment for Hepatitis C. In the first four years of launching in the Hepatitis C market, Gilead enjoyed total revenue of approximately $50 billion.
On that score, the Pharmasset acquisition was a financial success. However, Gilead did a poor job defending its market against competitors and has lost market leadership to AbbVie. 2019 revenue from this treatment is likely to be in the vicinity of just $3 billion.
Much worse, Gilead appears to have wasted most of the rewards via ill-timed stock buybacks, a risky acquisition, and R&D initiatives which have yet to bear fruit.
From 2014 to the present, Gilead is approximately $10 billion underwater compared to the price it has paid for its own shares. In 2017 the company paid $12 billion for an emerging oncology company called Kite Pharma.
Kite boasted a very exciting new treatment leveraging cell-based therapies. Bringing this treatment to patients has proven challenging due to its medical complexity and lack of support from payors.
The acquisition has saddled Gilead with additional ongoing losses. The long-term future for cell based oncology therapies looks exciting, but Gilead’s early foray currently has the makings of a white elephant investment.
Meanwhile, development efforts in inflammatory diseases and NASH liver disease, two potentially enormous markets, have been slow to produce results. A partnership with Galapagos NV appears close to delivering an exciting inflammation drug.
The NASH pipeline is murkier. Management sounds very optimistic about the opportunity to address a stubborn disease with combination therapies, but trial data has been underwhelming so far.
The company’s success in HIV was largely built on its ability to combine therapeutic molecules into optimal regimens. Maybe it can do the same in NASH. Success in either of these areas could be enough to get the stock going again. Success in both would be very rewarding. The decline of the Hepatitis C portfolio turned Gilead’s overall growth rate negative for four years.
The base is now small enough for strength in HIV to overcome the weakness in Hepatitis C. Gilead has officially returned to growth, but it will take some work to earn back the market’s trust.
Investors have become accustomed to failure at Gilead. At some point, the company needs to get its substantial cash flows working for it again.
This responsibility falls to new CEO Daniel O’Day, previously in charge of Roche’s Pharmaceuticals division. O’Day will scour the public and private markets for partnership and acquisition opportunities.
Gilead’s balance sheet is loaded with approximately $30 billion in cash. Its debt is almost equally high but maturities are spread out, so most of the cash balance should theoretically be in play if opportunities come along. We model 10% compound EPS growth, with a P/E range of 11.1 to 14.5.
Our forecast low price is 55.5, the product of $5.00 per share in EPS and the aforementioned low P/E of 11.1. Our forecast high price is 106. The upside to downside ratio is 4.8 to 1. The stock is cheap, particularly considering the ongoing strength of its HIV portfolio.
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