Gilead: Why I'm Buying More
Summary
- 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.
Competition
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (201)
May 12, 2020 2:14 PM ET|About: Gilead Sciences, Inc. (GILD)|By: Douglas W. House, SA News Editor Gilead Sciences (GILD -1.2%) has out-licensed non-exclusive rights to antiviral remdesivir to India's Jubilant Life Sciences allowing the latter to sell the drug in 127 countries including India.Under the terms of the agreement, Jubilant may manufacture the med and scale up production.Gilead previously disclosed that it was in talks with several generic drug firms in India and Pakistan to produce remdesivir for developing countries.Update: The company says it has also inked non-exclusive licensing agreements with four other generic drug makers in India and Pakistan: Cipla, Ferozsons Laboratories, Hetero Labs and Mylan (MYL -2.2%) that apply to the same 127 countries.
Will specific (antibody) testing prevent the spread of new, not previously seen infectious diseases? Will a vaccine against SARS2-COVID-19 prevent novel infectious diseases? No and no.Thus we need to start thinking about this in a different way. If we are looking for drugs to "cure" Covid19 then we are only half-way to a true cure. We need to start taking a more holistic look at the immune system and create cocktails that diminish the ability of viral particles to latch onto cellular receptors, decrease viral loads, reduce potential cytokines storm and attack organ systems. This will involve a lot of trial and error and most likely will not result in one single "Superdrug", but several drugs working in tandem.I am afraid I have bad news for all you "when we get a vaccine this problem will be fixed". The history of vaccine production is littered with failure. There are the high profile failures (like HIV and malaria) then the moderately disappointing (yearly influenza vaccines), then the thousands upon thousands of viruses that we have spent $100s of million and decades of research and have never successfully developed vaccines for.
BY Dow Jones & Company, Inc.
— 8:15 PM ET 05/05/2020
Gilead Science's investigational antiviral remdesivir --proved effective against the Covid-19 virus in initial clinical trials--is being closely watched by the world. After receiving the U.S. Food & Drug Administration's emergency authorization last week, the company said the drug could be available to U.S patients as soon as this week. Now, the biopharma company is looking to expand that supply globally.
How to make remdesivir both accessible and affordable to patients around the world--especially in developing countries--is one of the pressing challenges facing Gilead. The company in a statement on Tuesday laid out plans to achieve that goal.
Gilead said it's in discussions with leading chemical and pharmaceutical manufacturing companies to produce remdesivir under voluntary licenses for Europe, Asia and the developing world through at least 2022.
China needs to be blamed for this mess. That Lego cartoon I saw on the weekend was offensive, misleading and is typical from a bunch of despots who currently run China. It will only inflame The Donald to do something stupid and unhelp in our fight with China for dominance in the 21st century.But as Jim Cramer said today, we are not in good shape right now to fight with China.We must regroup and look at what we can to to protect ourselves and our economic future.Look at what Gov Cuomo said on Friday about creating the seven state regional council to prepare for the next pandemic that does not rely on China for masks and gowns, etc.If Trump cannot lead here in a positive manner, others will step into his place.@gandc
very well said mate. though on this "Remdesivir is most effective for EARLY STAGE OR MILD COVID patients", while it is true also it is showing good results on severe cases (all trials were severe and critical so far). Even great antibiotics dont work for nearly final stage of bacterial infections if given too late.Most people forget when criticising REM efficiency that in a placebo study in critical times they give the medicine to the more critical and severe people(with much higher viral load) because they wanna give a try to those who are in worse state than the one who still have better chance of recovery w/o REM. Same thing happened in chinese study that came back "ineffective". Actually it showed that higher viral load critical patients show good improvement when administered REM. After all doctors who are running the tests are not heartless robots focusing on study materials they wanna save lives and they will give the chance to those who are most in need. So considering these facts and other experiences from Chicago, it is a remarkable improvement. No wonder that Fauci rushed to approve it and also Japan, they arent all just stupid politicians who are bribed by big evil pharma. REM works though it is not a magic cure it is still the best available option up till now.
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Sorry. I see no money here. I see Gilead headquater burning by angry mobs.
