Investment Thesis
Gilead Sciences (NASDAQ:GILD) has found itself in the spotlight this week for 2 main reasons. The first is - as most people doubtless know by now - related to the potential of the company's investigational drug remdesivir to treat COVID-19/the coronavirus.
The second is the company's surprise $4.9bn acquisition of Forty Seven (FTSV), an early stage biotech developing anti-CD47 directed therapies - most notably magrolimab, currently being evaluated for treatment of a range of cancers, including myelodysplastic syndrome ("MDS"), acute myeloid leukaemia ("AML") and non-Hodgkin's lymphoma ("NHL").
The market excitement around remdesivir has seen Gilead's stock price jump 22% from a more-or-less 5-year low of $62.5, to $76 - its highest level since September 2018. These gains may have been stymied by Gilead's announcement that it is to acquire Forty Seven - a company whose stock traded at $6.5 in early November 2019 - for a staggering $95.5 per share. Gilead investors could be forgiven for asking why a company would announce a major acquisition at a questionable price at the height of its first significant share price spike in nearly 2 years.
Gilead hired ex-Roche CEO Daniel O'Day as CEO in March '19, who has overseen numerous departures and arrivals at senior management level, and is trying to effect a turnaround in the company's fortunes. Whilst the Forty Seven purchase may remind investors of the $11.9bn acquisition of Kite Therapeutics in 2017, which has produced only one commercialised drug - yescarta (2019 sales - $0.5bn) to date, it's also worth remembering the $11bn acquisition of Pharmasset in 2012 which sparked Gilead's Hepatitis C franchise into life. Both Forty Seven and Kite have potential, in my view.
Gilead has experienced a tumultuous few years. In 2015, driven by $19bn per annum sales of its hepatitis C ("HCV") drugs, the pharma reported total sales of $32.6bn and net income of $18.1bn, whilst its share price rode high, peaking at around $120 in June of that year. The HCV empire began to crumble, however, as more and more patients were cured and the market shrank, whilst AbbVie (ABBV) and Merck (MRK) also entered the market leading to price discounting. In 2019, Gilead's HCV sales came in at just $2.9bn.
Since 2011, however, Gilead has grown sales of its HIV drugs at a CAGR of 14% to $16.4bn, and there are high hopes for biktarvy, which grew sales by >300% in 2019 to $4.7bn. The HIV franchise - being treatment rather than cure based - is thought to be more durable than HCV. However, many of Gilead's HIV drugs - most notably Truvada whose sales of $2.8bn in 2019 represent ~13% the company's total revenues - face a growing threat from generics.
In its pipeline Gilead has a number of potentially lucrative treatments ready to unleash on the market in 2020 - the most exciting of which may be JAK 1 inhibitor filgotinib - currently indicated for treatment of rheumatoid arthritis - which some analysts believe could generate peak sales of ~$3.8bn.
Taking all of this into account 2020 looks to be a critical year for Gilead as it attempts to absorb the hit to its HCV franchise and position the company for both sales and share price growth. This will require a delicate balancing act involving shifting the focus from once-lucrative product lines, to maintenance of its best-selling assets and the introduction of new treatments. As such, although the company's forecast sales of $21.00-22.20bn and GAAP EPS of $5.15 - $5.55 for the full year 2020 may seem slightly underwhelming, they should be viewed in the context of a company in transition.
In the rest of this article, I will discuss where I think Gilead can make gains in 2020 and where it might struggle, and whether - thanks to remdesivir, filgotinib, and other near-term pipeline developments - Gilead could spring a surprise and finally realise some significant upside for investors. Even if 2020 proves to be a challenging year, an attractive dividend paying $0.68 per quarter in 2020 and the current low share price - highly sensitive to breaking COVID-19/remdesivir news - makes Gilead a worthwhile investment, in my view.
Remdesivir: hype of substance?
The obvious place to start is with remdesivir. Prompted by COVID-19 concerns, the company's investigational new drug application for the nucleotide analog was swiftly approved by the FDA, and the drug has now entered two phase 3 clinical trials. Remdesivir has demonstrated in-vitro and in-vivo activity in animal models against viral pathogens MERS and SARS, which are known to be similar in structure to the coronavirus. The two trials will further evaluate remdesivir for safety and efficacy in ~1,000 patients mainly based in Asia, using a 5 and 10-day dosing regimen.
The Chinese health authorities have also initiated 2 trials of remdesevir - for patients exhibiting severe and more mild coronavirus symptoms. Gilead is supplying the drug for both these studies at no charge and offering free consultation on trial design and execution. Results are expected to be available in April. Working alongside the CDC, FDA, NIH, and other health organisations, Gilead are also supplying the drug for compassionate use in the absence of any known effective treatment.
Remdesivir was initially developed as an antidote for the Ebola virus, and the drug was intensively manufactured and stockpiled in case of a pandemic. Remdesivir works by interfering with and disrupting the enzyme known as an RNA-dependent RNA polymerase - which the virus uses to reproduce itself. Gilead management has been at pains to point out that it is currently not known whether remdesivir is an effective treatment for SARS-CoV-2. The evidence that it could be seems chiefly based on the rapid recovery of an American man in Washington State treated with remdesivir, and some early testing completed in China that highlighted the efficacy of the medication along with 2 other treatments.
Recently, WHO Assistant Director Bruce Aylward told a press-conference in Beijing that "There is only one drug right now that we think may have real efficacy and that's remdesivir." However, reports estimate that some 80 clinical trials are now ongoing trialing potential coronavirus cures - and there are many RNA-targeting drugs on the market and in development that could yet prove to be more effective.
If remdesivir was to become the COVID-19 treatment of choice, analysts have estimated Gilead could earn between $80m and $150m in the short term, and potentially billions more in the longer term - based on the $1.8m of sales of Roche's (OTCQX:RHHBF) Tamiflu earned in response to the threat of an influenza pandemic. Any estimation of the value of remdesivir to Gilead is further complicated by issues such as patent disputes with China, generic competition, manufacturing capacity - and how much more significant the threat of coronavirus becomes.
Whilst it's impossible to put the COVID-19/remdesivir debate to one side, investors may find it easier to assess Gilead's intrinsic worth based on less "black swan" style events, whilst being mindful of the ongoing clinical trials and the spread of the virus.
Gilead's current portfolio
Gilead existing drug portfolio overview. Source: my table based on data from Gilead 2019 10K.
The table above breaks down Gilead's current drug portfolio and its performance over the last 3 years. We can see that the majority of the company's drugs are experiencing falling sales, mainly due to generic competition.
For example, if we look at Gilead's non HIV portfolio first, sales of HPV treatments ledipasvir/sofosbuvir (marketed as harvoni) declined 47% year-on-year from $1.2bn in 2018 to $643m in 2019. Sales of letairis - a treatment for pulmonary arterial hypertension ("PAH") - have declined 35% from $945m to $618m. Sales of ranexa - a treatment for chronic angina - have declined 72% year-on-year to $943m. The US patent for letairis expired in 2018 whilst the patent for ranexa expired last year. Where harvoni is concerned, the decline is offset by the migration of sales from harvoni to epclusa (Sofosbuvir/Velpatasvir), whose year-on-year sales were broadly flat. Migration of sales between Gilead-owned drugs clouds the overall sales picture somewhat.
Gilead total product sales in 2019 by quarter. Source: Gilead Q419 earnings presentation.
The above chart from Gilead's Q4 earnings presentation illustrates the rapid decline of the HPV franchise, however, and, a Q219 dip aside, the growing strength of the HIV franchise. The big Gilead success story is biktarvy, whose sales have catapulted by >300% year on year to $4.7bn, almost entirely offsetting the single-product declines and helping Gilead to grow its total revenues in 2019 to $22.1bn from $21.7bn in 2018.
Biktarvy is now (according to Gilead Chief Commercial Officer Johanna Mercier quoted in the Q419 earnings call) the number one prescribed HIV regimen in the US, with roughly 1 in every two naive or switch patients initiated on the treatment. Clinical trials have shown biktarvy to be an effective and lasting treatment, and sales have been forecasted to increase to $7.7bn by 2024.
Gilead also has high hopes for recently launched Descovy as a pre-exposure prophylaxis ("PrEP") treatment for HIV. Descovy was approved by the FDA for this indication in November last year, and Gilead has begun the process of switching patients from their existing PrEP treatment Truvada, to Descovy, before Truvada becomes a target for generics. The race is now on for Gilead to switch as high a percentage of Truvada users to Descovy as possible - a median expectation being that Descovy can switch 50% of Truvada users which would increase its sales volumes to >$3bn. A best case scenario would be ~75%. Descovy's PrEP patent is not expected to expire until 2025 at the earliest (based on discussion during the Q419 earnings call).
Finally, genvoya is Gilead's single tablet HIV treatment and despite a 15% year-on-year decline the drug still cleared $3.9bn of sales and has a patent expiry date of 2029 in the US and 2028 in Europe. Genvoya faces competition from GlaxoSmithKline's (GSK) HIV franchise - notably dovato, and also from biktarvy.
Taken as a whole, it is tricky to determine exactly what to expect from Gilead's HIV franchise in 2020. We can safely assume that Biktarvy and Descovy will grow sales volumes, and that Truvada and Genvoya sales will decline, but whether the former will offset the latter and how much volume will be lost to generics is harder to predict. Gilead estimates that the number of people using PrEP in the US currently stands at around 234,000, but could exceed 1.1m. With HIV patients living longer, it is estimated the market could grow to $22.5bn by 2024 and that Gilead controls around 73% of the market. This strikes me as too large a share to protect in the face of numerous threats, and that some erosion should be expected.
On balance, I am in agreement with Gilead management that sales within the company's HIV division are likely to be similar in volume to 2019, and that, long term, Gilead should be looking at pushing into new markets if it wants to realise significant revenue growth and diversify away from over-dependence on one market - this being a lesson learned from the HCV franchise.
Oncology: Yescarta and Forty Seven offer promise - with risks attached
Gilead's new management team - has taken the decision to create a separate entity for Kite Therapeutics, the $11.9bn acquisition the company's previous management made in August 2017.
Kite is focused on the chimeric antigen receptor "CAR-T" space, and to date, only Yescarta - indicated as a third line treatment for relapsed or refractory large B-cell lymphoma - has been approved, delivering $456m of sales in 2019 - a 72% increase on 2018 sales of $264m. Whilst this represents a slightly disappointing return on investment in the short term, it is far too early to discount Kite's potential contribution to Gilead's wider portfolio.
CAR-T therapy is a ground-breaking treatment which involves collecting samples of a patient's T-cells from their blood and re-engineering them to express chimeric antigen receptors, before re-injecting them back into the patient. The receptors are able to then bind with cancerous cells and help to destroy them. This is known as autologous CAR-T cell therapy. Allogeneic, or "off-the-shelf" CAR-T cell therapy is effectively the same process, using blood cells from a donor rather than directly from the patient.
CAR-T therapy is relatively unproven and therefore risky - to date, only 1 other treatment besides yescarta, Novartis' (NVS) kymriah - has received FDA approval. O'Day has arranged for Kite to move to a larger manufacturing site - a 20-acre facility in Maryland, and seems expectant that Kite will assume a leading role in Gilead's push into the oncology field.
A Biologics License Application ("BLA") was submitted to the FDA in January for Kite's second CAR-T treatment, KTE-X19 and regulatory approval is also being sought in Europe. KTE-X19 is a treatment for relapsed or refractory mantle cell lymphoma (MCL). Results from a recent phase 2 trial were positive, with the drug achieving a 93% overall response rate ("ORR"), 67% complete response rate and 71% progression free survival.
Like CAR-T, anti-CD47 antibodies are a groundbreaking, albeit relatively unproven form of cancer treatment. Forty Seven is at the forefront of this field of oncology. The company was founded by, amongst others, Stanford scientist Irv Weissman, who has played an instrumental role in the discovery and development of anti-CD47 therapy.
Cancer cells are able to over-express CD47 on their surface which send a "don't eat me" message to the body's immune cells, known as macrophages, which would ordinarily consume and destroy cancerous cells via a process known as phagocytosis. Forty Seven's antibodies are able to both block the cancerous cells' "don't eat me" signals, and add their own "eat me" signals, ensuring that cancerous cells are detected and destroyed. The treatment is particularly attractive since it uses the body's own immune system - the first line of defence against cancers.
Even so, many observers will marvel at the price Gilead paid for a company with no commercialised treatments that traded at just $6 in November 2019. Forty Seven investors will certainly be happy, but will Gilead's?
Forty Seven's primary candidate magrolimab has performed well in trials and has more than 10 trials currently ongoing. One of the attractions of the treatment is the wide range of cancers it can potentially treat (AML, NHL, MDS, DLBCL) and therefore, the large size of its TAM - all of these diseases have a substantial unmet need with currently available treatments only marginally effective. The early signs are that the drug works best in combination with other treatments such as azacitidine. A pivotal trial - ENHANCE - is currently underway evaluating the combination as a treatment for AML and MDS. Magrolimab has blockbuster potential, and there are two further candidates - anti-SIRPα Antibody FSI-189, and Anti-cKIT Antibody FSI-174 - in preclinical development.
On the oncology front, Gilead has made some substantial bets on treatment types that, on the one hand, may shape the future of the cancer treatment landscape, and on the other, could still flunk safety tests, or lack the efficacy to make an impact in their respective markets. My main quibble would be with the prices paid for the acquisitions, but Gilead does have cash in abundance - $11.6bn at the end of 2019, plus $18.7bn of short term assets (data from Company 2019 10K). The company is right, in my view, to want to have a presence in markets besides HIV and HPV, given their unpredictable nature and the dangers of LOE. Should one of Kite or Forty Seven's drugs prove to be winners - and there is a reasonable chance this will happen - then Gilead can secure lengthy patents on these potential blockbusters.
Galapagos and filgotinib
Gilead also has high hopes around the potential of filgotinib, a treatment for rheumatoid arthritis ("RA") that the company acquired as part of its $5bn deal for Galapagos which completed in 2019.
Gilead filed its NDA for filgotinib for RA in December last year and will hope for a swift approval process, based on positive data from clinical trials that suggests the product may be superior to the current market-leading product, AbbVie's Humira - a franchise estimated to be worth $20bn. Gilead believes that filgotinib has the potential for five new indication launches in the next four years, including for Crohn's disease and ulcerative colitis.
Filgotinib is not the only JAK inhibitor with designs on Humira's market share. Pfizer's (PFE) Xeljanz, already on the marketplace, and Eli Lilly's (LLY) Olumiant - which was denied approval on safety grounds - and upadacitinib - awaiting approval - are potential threats. Safety concerns have dogged JAK treatments, but Gilead has reason to believe filgotinib could be a winner in that regard based on early indications from its MANTA trial. Should it prove to be (and there are still risks to be considered that could see the FDA delay or deny approval), sales in the single digit billions ought to be achievable.
Conclusion - Gilead's price can rise with or without remdesivir, but patience may be key
If Gilead has struggled to recreate the highs of its $19bn-selling HPV franchise or 2015 revenues of >$30bn, then the company has at least proved to be resilient and capable of pivoting into new markets. Its treatment pipeline has consistently delivered winners such as biktarvy, or truvada - albeit many of them have had a short patent life meaning the company must keep churning out new candidates.
The requirement to find not just new drug candidates, but new drug candidates with blockbuster potential in many ways justifies the premiums Gilead has paid for Forty Seven's magrolimab, Galapagos's (GLPG) filgotinib and Kite's yescarta and KTE-X19. These are the non-HIV treatments the company will look to to provide fresh revenue streams - if Gilead opts not to make these kinds of investments, it faces not only losing out on a billion-selling drug, but also allowing a rival to pick them up instead. In this respect, biotech is very much a seller's market where a company that has developed a potential next big thing - even one that is far from proven - can name its price, and the pharma must pay for fear of losing out to a rival.
The challenges and opportunities for Gilead in 2020 are numerous. Juggling sales, approvals and indications within its HIV portfolio to provide support to the blockbusting biktarvy, managing losses within its fading HPV franchise, and rolling out new drugs in the oncology, inflammatory and fibrotic disease fields. And then there are the "black swan" events like COVID-19, which emerge from nowhere and yet demand an immediate and decisive response.
In my view, Gilead management have played it safe with their 2020 projections, and even thrown an accounting change into the mix - adding share based compensation back into its non-GAAP figures - to further muddy the waters. I believe that the company believes it can outperform the targets it has set itself, but is placing more of an emphasis on getting new drugs onto the market to ensure it has a more diversified portfolio and is not so dependent upon HIV.
That said, HIV is still the company's bread and butter, and it will look to biktarvy and genvoya - with patent expiry dates of 2033 and 2029, respectively - to lead the charge.
When Gilead's sales were >$30bn, the stock traded at $120 so we can assume that such a price target is unreachable for the foreseeable future, but logically, with revenues above $20bn, a price target of $100 does not seem out of reach. The stock is currently buoyed by the remdesivir news and is defying the general market slump, making gains against the trend.
I do not think the gains have made Gilead's price disproportionate to its intrinsic value, and as such, buying in the next week should ensure that investors benefit from any further remdesivir news, whilst the downside risk is mitigated by the progress the company can make across its more entrenched businesses and soon-to-be-approved drugs during the remainder of 2020 and into 2021, which is likely to be when Gilead's portfolio comes into its own.
