- Sell-side analysts are very skeptical on the value of remdesivir.
- Meanwhile, remdesivir was approved for emergency use.
- The emergence of a therapy may have a reflexive effect.
- Near $80 with remdesivir approved, I think there's value here.
- This idea was discussed in more depth with members of my private investing community, Special Situation Report. Get started today »
On Friday, I added some extra Gilead (NASDAQ:GILD) to my portfolio after several sell-side reports cast skepticism on the profitability of remdesivir. Remdesivir, of course, is Gilead's highly-anticipated antiviral candidate for COVID-19. After the close on Friday, the FDA approved the emergency use of Gilead Sciences' remdesivir. I think many analysts are underestimating the potential for this drug. Some examples via Seeking Alpha:
Raymond James rings the register, downgrading to Market Perform. "We aren't going to wild guess Remdesivir NPV," goes the title of their note.
SunTrust downgrades to Sell from Hold: "Lack of visibility to growth." Their $70 price target suggests nearly 20% downside from last night's close.
Another analyst has a peak sales assumption north of $2 billion in 2021 and about $500 million in 2020.
Peak sales assumptions of $500 million in 2020 let that bearish assumption sink in. At $5,000 per treatment that's 100,000 treatments six months into a global pandemic.
I liked Gilead (GILD) a lot down in the mid-$60s. Remdesivir was basically a freeroll back then. Here you can find links to all my previous public remdesivir discussions. I agree it's a lot more speculative in the $80s, even after remdesivir is now approved for emergency use. Having said that, here's why I think it's still worth holding and believed analysts induced a buying opportunity with their bearish interpretation on the cusp of FDA emergency authorization.
The main fears on the sell side seem to revolve around the profitability of this drug. They seem worried that Gilead is giving away 1.5 million doses (max 300k treatments) and doesn't reveal much about the economics while the company is incurring substantial and tangible costs associated with this rollout.
This is a classic case of confusing uncertainty with risk.
Let's not forget that Gilead was a mid-$60s stock before COVID-19. And it traded at a very modest below 10x free cash flow multiple, with no net-debt on the balance sheet, spending copious amounts on R&D.
From the Gilead earnings call:
Porges: "Should we assume the capital returns and the profitability for providing a global treatment for COVID-19 long term, after the first 200K-300K courses are provided on a donation basis? Should we assume the returns are going to be similar to the returns that you've generated in other parts of the business?"
CEO Daniel O'Day: "There's been no other time like this in the history of the planet... There is no rulebook out there, other than that we need to be very thoughtful about how we can make sure we provide access of our medicines to patients around the globe... So points well taken." O'Day continued that it's too early to discuss potential revenue. "We understand our responsibility."
Gilead is extremely reserved about the potential profitability of remdesivir and understandably so. No good will come from them emphasizing the money-making opportunity like the latest penny stock biotech.
It's undeniable that global behavioral modification is holding infection rates down and still there's growth in new cases. Here's the Johns Hopkins map for the moving averages of new confirmed cases over the past five days:
Source: John Hopkins
Still, there are 3.1 million cases. Those are cases that are actually tracked and make their way into the JH data. It's an accepted fact there's a multiple of cases out there. There's debate around how many but that's for another day. This virus started spreading in December 2019. That's just six months ago. Some countries moved heaven and earth to slow it down.
About 20% of cases end up as severe cases which is the addressable market of remdesivir under the emergency authorization.
Meanwhile, Gilead is projecting higher production figures for remdesivir:
In the Economics of Remdesivir, I wrote:
At 300k therapies per month and a therapy being anywhere between $500 and $5000 (at 80% gross margins), this could still be a significant therapy to Gilead's bottom line.
This translates into between $150 million and $1.5 billion worth of revenue per month. That's between $1.8 billion and $18 billion of revenue. If it's the former, Gilead has run a bit too far (although it does not look to me like a way overvalued stock even in that scenario given it started from quite an attractive level).
The above is based on pricing floated around by analysts. I don't know how Gilead is going to price the drug.
If the price of therapy is close to $5k I believe Gilead has a lot of room to run. A lot depends on the competition and the trajectory of COVID-19. There's no reason for the ceiling to be $5k but that's the highest number I've seen thrown around. Between $1.8 billion and $18 billion of annual revenue would be highly significant to Gilead and its $22 billion of annual revenue.
Keep in mind that the emergence of a valid therapy is going to have a reflexive effect. People are going to justify opening up society a bit based on its emergence. Infection curves are not a static thing.
My take on the situation is that as long as Gilead stays generous, humble and dedicated to helping governments reel in their outbreaks, they are likely able to charge quite a bit without paralyzing pushback.
There are two types of competition - other treatments and a vaccine. I really hope remdesivir gets competed away. The threat is real and I think that's another argument in Gilead's favor - to be allowed to charge a reasonably high rate to be able to ensure it generates a return.
It doesn't seem to me that there are silver bullets out there in terms of treatment. Note that it's not my expertise but remdesivir is widely touted as one of the more promising ones. It's far from a perfect solution yet.
There's still hope for various treatments. I think we are going to need most, if not all of them. The more treatments we have that require different handling/production methods/raw materials, and potentially are effective for different patients, the better.
Below, from the latest Gates notes, an infographic on the typical timeline to a vaccine. His excellent blog also goes into great detail about this process (highly recommended):
Here's a quote from Gates blog:
For COVID-19, financing development is not an issue. Governments and other organizations (including our foundation and an amazing alliance called the Coalition for Epidemic Preparedness Innovations) have made it clear they will support whatever it takes to find a vaccine.
It's amazing to me that the Fed is engaging in quantitative easing infinity. The government is throwing whatever it takes at the development of a vaccine. People are demonstrating and rioting against social distancing measures. But somehow the sell-side insists Gilead will have a hard time generating a substantial profit with this therapy.
Check out the Special Situation Investing report if you are interested in uncorrelated returns. I look at mergers & acquisitions, spin-offs, companies with buyback programs, rights offerings as well as unique opportunities like Gilead today, which is so well positioned with its Remdesivir cure.
This article was written by
I gravitate towards special-situations. That means situations around companies or the market where the price can move in a certain direction based on a specific event or ongoing event. This eclectic and creative style of investing seems to suit my personality and interests most closely.
Since 2020 I host a podcast/videocast where I discuss (special-situation/event-driven) market events and investment ideas with top analysts, portfolio managers, hedge fund managers, experts, and other investment professionals. I highly recommend it (pick episodes around topics that interest you) for the amazing guests that come on with regularity.
I've been writing for Seeking Alpha since 2013 after playing p0ker professionally. In 2018 I founded Starshot Capital B.V. A Dutch AIF manager. Follow me on Twitter @Bramdehaas or email me Dehaas.Bram at Gmail
Analyst’s 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.
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