Gilead Sciences is on the cusp of a breakthrough in NASH.
Periodically, analyst conferences may reveal a nugget of useful information that helps expands the overall understanding of the business model of a particular company. The recent presentation by Norbert W. Bischofberger - Executive Vice President, Research, and Development and Chief Scientific Officer holds unique appeal as an in-depth review of the pipeline's prospects is presented in a clear and concise manner. The quotes below are taken from the Sentieo.com research platform.
Gilead Sciences' (NASDAQ:GILD) share price rocketed higher over the past few years as a cure for Hepatitis C worked its way through the regulatory process. GILD captured the appeal of a diverse set of investors with the appealing combination of a low multiple and an extended sales window as the world governments will push for mass treatment of those afflicted with the disease.
The nagging issue plaguing the share price of GILD is the inherent difficulty in accurately modeling the HCV franchise revenue growth. By providing a functional short course cure, the traditional annuity-like revenue stream is absent making projections inherently murky. GILD faced an intense backlash over the price of the treatment coupled with hardball negotiating by the likes of Express Scripts (NASDAQ:ESRX) led to significant volatility over the past two years.
As evidenced by the chart below, GILD recent earnings result stunned everyone leading to a free fall as shown below.
Of particular note is the weakness over the course of the last four trading days. The sector as a whole faces a renewed set of selling pressure as recent presentations from the ASCO conference failed to generate enthusiasm. The iShares Nasdaq Biotech ETF (NASDAQ:IBB) sank as Biogen (NASDAQ:BIIB) highly anticipated data read on Opicinumab failed to demonstrate its primary endpoint sending shares of BIIB sharply lower.
BIIB is one of the top five holdings of the IBB along with GILD, with ETF's rapidly becoming the favored trading vehicle, the entire sector felt the pain.
The Goldman Sachs Conference
The lifeblood of the biotech industry is the health of particular companies clinical pipeline. I find commentary on the health of the research effort to be of particular value moreover than financial moves such as share repurchase plans. The patent granting monopoly-like profit margins is a "wasting asset" that needs to be maximized to the greatest extent possible. Share repurchase programs have merit especially in low-tech fields such as food processing as the product does not change much over time. I found the following quotes to have the most value.
Norbert W. Bischofberger
So yes, in this area (NYSEARCA:NASH) I have really high confidence that we'll get to the finish line. So we always said we think of NASH as a compound of three components biologically. There is an inflammatory component; there is a metabolic component most of these people have diabetes, and there is an extracellular component in terms of fibrosis formation, and we have now modalities.
So mechanisms that address each one of these and the ones you said it's exciting we have Phase II data coming up out read out this year with the ASK inhibitor with the FXR agonist and with the - with Simtuzumab and with the ACC inhibitor. And by the way, we know already that the ACC inhibitor does what it's supposed to do and we will find out about ASK and FXR.
I find the above quote very revealing. It seems with little fanfare; GILD has nicely rounded out their approach to NASH by adding the FXR agonist via the purchase of Phenex coupled with the recent acquisition of the ACC inhibitor from Nimbus. As for the rumors of an acquisition of Intercept (NASDAQ:ICPT), to acquire their FXR agonist OCALIVA™ ( obeticholic acid), Bischofberger effectively ruled out the notion with the following quote.
So let's talk about diverse on differentiation from OCALIVA, so both are FXR agonists, so they have the same mechanism, but OCA is a bile acid, and bile acids do many things in your body and side effects that we are seeing the rash.
There was also a side effect of reducing HDL fairly substantially, and we have the philosophy instead of dealing with an orally absorbed systemically active bile acid analog we have an FXR agonist that's minimally, orally absorbed that simply works into GI and releases FGF19.
The FGF systematically it's created FGF19 then goes to deliver and does all the beneficial its takes that are needed in NASH. So this is hypothetical, but I think it's a good reason to believe that we could have something that is equally active without any of the side effects. So that's the differentiation. By the way, we have lots of below connect our FXR agonist in PBC and PFC as you know OCH has got approval for PBC (primary biliary cholangitis).
The side effect profile is of paramount concern to clinicians as the remedies for NASH is a long-term treatment. GILD approach assuming validation via clinical data due at the end of the year will lead to a vastly improved side effect profile.
The third and fourth quarters of this year will be rich with data that may set the course of future share price movement. The fourth quarter of 2016 will include the US presidential elections which may ease investors disdain for healthcare names. Part of the reason for the dramatic underperformance is the threat of new legislation. For those who are willing to look past the immediate term, the biotech sector offers appealing growth prospects.
In the third Quarter, GILD is slated to report phase 2 results for GS-4997 (ASK-1 inhibitor) for PAH and NASH. In November, phase 1 results for GS-9674 (FXR agonist) for the treatment of NASH. At this point, management should have a preliminary read if their thesis concerning minimal oral absorption leads to a superior side effect profile. Rounding out the flood of NASH data is the 96 weeks read on Simtuzumab. I thought the following quote was quite revealing.
Norbert W. Bischofberger
- And then the other question was, why do I believe that simtuzumab will work in liver fibrosis even though it has not shown to be active in IPF myelofibrosis and tumors. What a simple reason is you could make an argument, and therefore fibrosis is different from IPL. By having that said it is somewhat liver fibrosis it is different from IPF. However, having that said, it somewhat diminishes my enthusiasm about simtuzumab because it simply hasn't shown any activity yet in any of the diseases that we chose to do.
I applaud management here for proactively moving to broaden their arsenal to treat NASH in a brilliant and cost efficient manner. It seems the data they are privy to does not seem overly favorable pertaining to Simtuzumab, so they filled in the gaps rather quickly with small bolt-on acquisitions as detailed above. In my view, NASH is the single "must have" treatment for GILD. They can ill-afford to allow an upstart to leapfrog them in the quest for a viable treatment. The remedy for NASH will require long-term treatment allowing for the traditional valuation model to take hold once again. While the HCV franchise in my view will generate over $100 billion in lifetime sales, it is GILD ability to create an additional franchise similar to its dominate HIV platform that will jump start the share price.
The first quarter earnings report broadsided many investors leading to a dramatic sell-off in the stock price. To say the least, the management team did not manage Q1 expectations correctly. I am pleased to see some executive reshuffling to help guide the company forward. The first move is to bring back an experienced hand in Kevin Young to the role of Chief Operating Officer. Young has extensive experience in dealing with the analyst community, I suspect mishaps such as the recent quarterly announcement will become a thing of the past.
The second change is the addition of Martin Silverstein to the role of Executive Vice President of Strategy. Silverstein has extensive experience as a consultant with his most recent assignment as the Chief Strategy Office of Anthem. GILD has done a less than stellar job handling the PBM's in regards to their HCV franchise which in my view makes a higher of this magnitude a necessity. Additionally, in my opinion, it signals a willingness to engage perhaps in additional M&A on a larger scale.
Finbox. io Fair Value Model
Link to full work courtesy of Finbox.io. The Finbox.io platform is an invaluable tool that has aided in my entry and exists in various equities. A must for the value investor.
My fair value remains mired at $121 yet continues to trend down based on disappointing results. While guidance remains unchanged, uncertainty has increased which necessitated a drop in the exit multiple and an increase in the discount rate. As per custom, I use the bottom of management's revenue guidance when attempting to configure GILD fair value. GILD fair value will rise if the company can generate additional sales in the 2018 and 2019 time frame.
The out years in the DCF will be affected based on the ability of current pipeline to produce other viable treatments to offset the erosion in sales of the HCV franchise. The hiring of Silverstein may allow for a larger, more strategic acquisition. Management has mentioned multiple times the relatively small size of the companies workforce (less than 9k employees versus the 25k plus of traditional pharma). If GILD were to take out Medivation (NASDAQ:MDVN) or Vertex (NASDAQ: VRTX), per the rumor by a prominent analyst last year and discussed in depth here, GILD fair value would rise into the $140 range. GILD would show the timeless pattern of continued revenue and earnings growth which equates into a higher multiple. Until this time, either through internal development or external additions as long as revenue trends down GILD will stay mired at a single digit multiple.
Chart courtesy of Wall Street Horizon, a fantastic app for tracking future corporate events or on Twitter @WallStreetHorizon
The month of June contains two additional conferences where GILD will make a presentation. The highlight of the month is the expected approval of Sofosbuvir/Velpatasvir by June 28th.
The biotech sector remains under siege for the duration of the year. The important aspect here for longer-term investors is to use the uncertainty to scale into positions at an attractive price. GILD dividend does hold some appeal here as you are paid to wait for the clinical pipeline to bear additional fruit. I would like to thank you for reading, and I look forward to your comments.
Disclosure: I am/we are long GILD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.