Gilead Sciences: P/E And The Pipeline Beyond HCV

| About: Gilead Sciences, (GILD)
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Summary

Gilead has a P/E ratio typical of companies that are not growing fast.

Gilead’s pipeline of potential therapies negates the idea that earnings will not continue to grow.

As the pipeline gains focus from HCV cures, the P/E is likely to expand again.

Much has been written about Gilead Sciences (NASDAQ:GILD) this year following the smashing success of its treatments for HCV (Hepatitis C). Don't you wish someone had told you why to invest in Gilead Sciences say 7 years ago, when the stock could be had for a little as about $20 per share (split adjusted), as opposed to the $113.71 per share it was worth at the close on June 8, 2015?

I wrote my first blog about Gilead on September 10, 2007: Choosing a Biotech Stock 2: Gilead. It became one of the first biotechnology stocks I bought on October 17, 2007 for $21.12 per share (split adjusted). Prior to that my portfolio was mostly information technology stocks. My first Seeking Alpha article recommending Gilead, Gilead Sciences Hepatitis C Approval May Be Factored In appeared on July 30, 2013, when Gilead closed at $61.73, giving it a P/E of 41. I very much underestimated how much Gilead would be able to charge for Sovaldi in that article.

Like most analysts today I believe Gilead is a buy at today's prices, given it now has a P/E of just 13.0. That is a P/E more typical of slow-growing companies. With the usual caveats, I see earnings continuing to grow, and I believe another point will come where the value of the therapies in the pipeline will become so obvious that Gilead's P/E will expand significantly in anticipation of future earnings. But I also note that Gilead stayed in a narrow range, between about $16 and $21 per share (split adjusted) between the beginning go 2007 and the end of 2011. The exact timing of any significant P/E expansion is or major stock price appreciation is unknowable.

The biggest question about Gilead posed by analysts and investors is: how long can the current flow of revenue, earnings, and cash flow last? After all, Gilead is curing patients of hepatitis C, so eventually the number of patients needing its Harvoni or more advanced HCV therapies will decrease. The answer depends on the pipeline of non-HCV therapies that will be commercialized not just in the next 3 to 5 years, but over the coming decades. So those of us investing with a long time horizon need to turn our attention from Harvoni sales to the pipeline, including pre-clinical therapies. It's a big task, so this article will just scratch the surface.

Every pharmaceutical company with a sufficiently broad pipeline will have some candidates or indications that bomb out before commercial approval. Gilead's long record of gaining approvals shows its scientists have good judgment about what is feasible versus ideas that pose too high of a risk. Given that, I have found it is generally reasonable to trust Gilead's statements about its pipeline's likelihood of success.

Norbert W. Bischofberger, PhD, Executive Vice President for Research and Development and Chief Science Officer, discussed the pipeline in detail at the April 30, 2015 Q1 analyst conference. He began by saying "I have often been asked about our next phase of growth, and I have never been more confident, because of the numerous programs we have to address unmet medical need."

HIV

Until the recent dawn of HCV medicines, the bulk of Gilead's revenue came from therapies for HIV. Gilead continues to improve its HIV therapies, with TAF (tenofovir alafenamid) now being added to formulations, and already showing strong Phase III data. The FDA should decide whether to approve the new formulation by November 5, 2015, with other formulations to follow, most likely in the first half of 2106. In addition there is GS-9883 in Phase 2. While remaining competitive in this field is important for Gilead, it is not likely to be an area of strong revenue growth unless the HIV infection rate rises from its current levels. However GS-9620, currently in Phase 1, could be part of a combination therapy that cures HIV. Given the difficulty of curing HIV infections, I would wait for Phase 2 results before getting excited. But if Gilead has a cure it could charge rather a lot for it, which would frontload revenue. On the other hand there are a number of rivals, like Inovio (NYSEMKT:INO) working on vaccines. If one of those vaccines ever works, that would undercut the value of Gilead's current HIV franchise.

Liver Diseases

Not resting on its Harvoni laurels, Gilead continues to research HCV therapies, notably combinations including GS-5816, which it hopes will have high cure rates for all genotypes of hepatitis C even with short durations of treatment. Results from four Phase 3 studies should be available in the third quarter of this year. A combination of Sofosbuvir, GS-5816, and GS9857 is in two Phase 2 studies, with similar goals.

For hepatitis B, Gilead continues to search for a cure. Two therapies, GS-9620 and GS-4774 are in Phase 2 studies to further this goal. If successful this could lead to a leap in revenue and earnings on the same order of magnitude as the HCV cures. But keep in mind that other companies are also in this race. Data from these Phase 2 studies should be available before the end of the year. In addition TAF is in a Phase 3 trial to treat (but not cure) HBV. Note that Gilead's Viread is already used to treat (but not cure) hepatitis B, and had sales of $234 million in Q1.

Simtuzumab is in two Phase 2 studies, one for NASH (non-alcoholic fatty liver disease), and one for Primary Sclerosing Cholangitis. Trials are fully enrolled, but have long timelines, so data won't be in until around Q4 2016. While these are not as common as hepatitis infections, they have high unmet needs and would doubtless be priced accordingly if they gain FDA approval. GS-4997 and GS-9674, which each have a different mechanism of action, are also being explored for NASH therapy. As usual, there are other companies trying to develop a NASH therapy.

Inflammation and Respiratory

Simtuzumab is also in Phase 2 for pulmonary fibrosis, but results won't be in until 2016. GS-5745, an MMP9 antibody, showed promise in a Phase 1b study for ulcerative colitis, so it will enter a Phase 2/3 study in the second half of this year. GS-5745 is also being tested for Rheumatoid Arthritis (a crowded field, but always leaving room for improvement), COPD, and Crohn's Disease. All of these would be major revenue generators if the drug gets approved.

Cardiovascular

GS-4997 is also being investigated for Pulmonary Arterial Hypertension. Ranolazine data should be coming soon for Incomplete Revascularization Post-PCI, and with Dronedarone FDC for Paroxysmal Atrial Fibrillation. GS-6615 (like Ranolazine a late sodium current inhibitor) is in trials for four cardiovascular indications, the most advanced in clinical trials being Long QT-3 Syndrome. This is a rare disease, but others in this category are relatively common.

Oncology including Hematology

Gilead sees oncology as a major area of opportunity due to the large unmet medical need for better cancer treatments combined with ongoing science advances. Gilead sees the future as being chemotherapy-free drug combinations.

Gilead has 30 ongoing or planned clinical studies in oncology, including 10 Phase 3 studies. Idelalisib is the most advanced therapy, with indications including CLL (chronic lymphocytic leukemia) and NHL (non-Hodgkin's lymphoma). Results from this were presented at ASCO in May.

Gilead has four classes of kinase inhibitors under study: GS-9901 for PI3K; Momelotinib for JAK; GS-4059 for BTK; and Entospletinib for Syk. Since these target multiple signaling pathways Gilead is in a position to use them in combinations as therapies. However, the current clinical trials are as monotherapies, which helps establish safety parameters. Gilead is also pursuing collaborations with other companies. For instance Idelalisib will be combined with a checkpoint inhibitor from AstraZeneca (NYSE:AZN) for B-cell lymphoma and triple-negative breast cancer, starting later this year. There is also evidence that kinase inhibitors stimulate the immune system, so Gilead will be testing that out, and also branching out to treating solid tumors.

Momelotinib, the JAK inhibitor, will enter a phase 3 study later this year in front-line pancreatic cancer. In fact a swarm of studies of Momelotinib are being evaluated or planned for initiation, in addition to the Phase 1 trial for second-line pancreatic cancer currently underway.

Finally, the Phase 1 study of GS-5745 was so successful that Gilead is moving directly to a Phase 3 study for gastric cancer, likely to begin in Q3.

Recent development

On May 31, 2015 Gilead announced that Zydelig decreased the risk of disease progression in 73% of subjects in a Phase 3 trial for previously-treated CLL patients. Zydelig was approved in July 2014 for relapsed CLL, follicular B-cell non-Hodgkin lymphoma, and SLL (small lymphocytic lymphoma), and recorded revenue of $26 million in Q1.

And the Point Is …

Does all that seem overwhelming? That is just a summation. An entire article could be written about the potential value of each of the therapies mentioned above.

The take away is Gilead earnings are going to continue to expand for the conceivable future. Quarter by quarter Gilead's exact market share and pricing in the HCV market may seem important, but the big picture is it will take a couple of decades to eradicate HCV and hence that profit stream. In the meantime Gilead will continue to bring new non-HCV drugs to market.

Eight years ago if I had listened to certain sell-side analysts I would not have bought Gilead stock. Those analysts were much more concerned about the future expiring of HIV therapy patents than about the value of Gilead's expertise in identifying therapies that addressed the needs of patients.

You can overpay for a biotechnology pipeline, as I have pointed out in other articles. But right now, with Gilead at a P/E of 13.0, you are essentially getting the pipeline for free. That's right, free.

And then there is the cash

In Q1 Gilead generated $5.7 billion cash flow from operations. The cash balance was $14.5 billion, with long-term liabilities of $13.3 billion. The liabilities mainly resulted from buying the current HCV therapies (something also causing dismay among many analysts when it happened).

Gilead can use its cash to buy just about any future therapy that it desires, whether pre-clinical, mid-stage, or late stage.

Conclusion

I can't guarantee that Gilead's P/E will expand, though if the markets were rational, it would. I am betting, however, that earnings will continue to grow on a y/y basis, if not as fast as they did in 2014. Not only is Gilead a buy at today's price if you are a long-term investor, but if the P/E does expand, it will be a great short-term play too. This will likely happen when investors and analysts get over worrying about how much Harvoni revenue will be generated in a given quarter and start looking further into the future.

An investor might do better, percentage wise, in the short run, with some of the smaller biotechnology stocks, but only by accepting far more risk. For instance since my May 15 article, Agenus Can Continue to Rise After Doubling, AGEN has gone from $7.03 at the close on May 14 to $9.00 at the close of June 8, an increase of almost 22% in less than one month. Small biotechnology companies can generate high rates of return, but they can also crash if their pipelines fail to materialize.

For the combination of safety and growth potential (plus a newly-initiated dividend of $0.43 per quarter), I don't know of any stock, biotechnology or otherwise, out there right now that is as good as Gilead.

Disclosure: The author is long GILD, AGEN, INO.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.