- Gilead's COVID-19 treatment Remdesivir has received enormous attention, but the stock is attractive even without considering it all.
- Recent additions and initiatives indicate a return to growth prospects.
- I particularly shed light upon the company's exemplary management, shareholder yield, and valuation.
- Gilead is an attractive stock for any portfolio, but in particular, from a dividend growth perspective.
From a risk-adjusted perspective, I consider Gilead Sciences (NASDAQ:GILD) to be one of the most appealing investment opportunities right now. Gilead, being a large pharma company, is acyclic and recession-resistant, which are very important traits to possess with one of the most severe recessions in history looming. Moreover, with its medication Remdesivir, the company is positioned at the forefront of treating COVID-19, which suggests that it may be one of the few companies not hit hard by a possibly occurring second wave of the pandemic and might even increase its sales as a result of it.
However, while a lot of recent articles on SA have focused on Remdesivir's potential (e.g., here, here), Remdesivir will not be featured prominently in this article. I consider this both sensible and prudent as any further revenues and earnings based on Remdesivir are very hard to predict and inherently speculative due to enormous uncertainties regarding the medication's approval, its price tag, its future competition, and the number of people infected with COVID-19 in the future.
Instead, after a brief general overview, this article will focus on aspects that have not received much attention lately, namely Gilead's management, its recent shareholder yield and its cheap valuation even when not considering Remdesivir at all. In this way, it aims to show that Gilead poses an interesting investment opportunity, in particular as a dividend growth stock.
For a holistic view, I suggest reading DoctoRX's great articles (Part 1, Part 2) in combination with this one. Nevertheless, I want to briefly summarize Gilead's operations from my point of view. Gilead's revenues are currently reported in four segments, of which I show the Q1 revenues in the following. In particular, it can be seen that, after several quarters of pretty much flat growth, Gilead was able to achieve a 5% revenue growth (partly driven by COVID-19-related inventory pull-forward, which is expected to draw down in future quarters).
% of Sales
Product Sales (million $)
Source: Q1 Earnings Call Presentation
I will briefly discuss each of the four segments before elaborating on future growth prospects.
HIV: The HIV franchise has become by far the most important part of Gilead, bringing in three quarters of the revenues. Gilead possesses the leading medication called Biktarvy, which is the #1 prescribed HIV regimen in the USA (sales of $1.4 billion) and in the most important European markets. It is patent protected until the early 2030s and expected by Gilead to be the preferred treatment option until then. Gilead is the definitive leader in the space. Overall, Gilead's current dependence on the HIV franchise is also a negative, but it is diversifying away from it. Moreover, the growth in the franchise can be estimated to at least offset the probable losses in the HCV and "Other Products" segments (see below), as it has recently. The franchise has grown with a 13% CAGR since 2011. For more on Gilead's HIV franchise, I recommend this article.
HCV: While the HCV franchise once was Gilead's most important segment, it is now in secular decline. This can mostly be attributed to the fact that cures for the disease are available (including Gilead's), reducing the patient population which needs to be treated. This segment can be estimated to decline further, even though upcoming revenue in China might briefly turn around the deterioration. Still, the HCV cure certainly represents a great achievement by Gilead for all affected people.
Yescarta: Gilead obtained cancer cell therapy Yescarta by means of its KITE acquisition in 2017 for a price of $11.9 billion. KITE was a leader in the emerging field of cell therapy. While the technology itself certainly is groundbreaking, so far, not too much has come of it with respect to revenues for Gilead, and most observers probably see the acquisition as a disappointment so far. However, the new management has made a few changes in regard to how KITE is treated within Gilead, and the growth rate for Yescarta has recently picked up (46% in Q1 2020). Together with further treatments in the pipeline (KTE-X19 might receive its first approval in H2 2020), I do expect continued growth from this segment.
Other Products: This segment mainly consists of products for which patent protection has run out or will soon run out and which are of less importance for Gilead's future. It must be assumed that revenues from this segment will deteriorate further.
Overall, while the current segments seem solid and, as a whole, slightly uptrending, they do not represent a significant growth opportunity. However, this is where Gilead's recent additions and initiatives come in:
Galapagos/Filgotinib: In 2019, Gilead entered into a global research and development collaboration with Galapagos (GLPG). Galapagos offers a broad inflammation and fibrosis portfolio. The most notable (at least for now) medication that plays a role in this partnership is Filgotinib, a selective JAK-1 inhibitor with potential best-in-class profile. While the medication will probably not be able to avoid black label warnings similar to AbbVie's (ABBV) Rinvoq, it still has the potential for billions of annual future sales for important indications such as Rheumatoid Arthritis, for which it may be approved soon. Other candidates with significant potential are also part of the agreement.
Forty Seven/Magrolimab: In April, Gilead finalized its $4.9 billion acquisition of Forty Seven. With Forty Seven comes, in particular, the drug Magrolimab, which may restore the ability of macrophages to detect and destroy cancer cells. Gilead's CEO Daniel O'Day stated that Magrolimab "could potentially have transformative benefits for a range of tumor types". This acquisition complements Gilead's expertise in oncology, and while it is still too early to estimate potential revenues, the road taken is definitely interesting and offers substantial upside.
Moreover, there are further initiatives ongoing, such as the very recently communicated 10-year-agreement with Arcus Biosciences (RCUS), also in the field of oncology. Additionally, of course, Gilead invests substantial funds into in-house R&D ($1 billion in Q1 2020 alone, up 8% from Q1 2019). Clinical stage programs totalled 48 as of Q1 2020. Overall, I believe that these initiatives, combined with the stable to slightly uptrending four current core segments, will result in decent growth rates for Gilead in the next few years, while being recession-resistant due to the nature of its products.
I also feel obliged to note that, apparently, as of latest news, AstraZeneca (AZN) has approached Gilead about a potential merger. This article is based on the assumption that this merger is not going to happen. The merger would certainly change the whole investment thesis; based on my initial analysis, the merger is not a good idea because AstraZeneca seems very richly valued right now, in contrast to Gilead. According to the information available so far, Gilead may also not be too keen on the merger: There have been distinct changes to its business structure lately, including the renewed focus on oncology, which makes the engagement in such a transformative deal questionable. Moreover, there might be regulatory hurdles.
I regularly hear commentators on SA complain about Gilead's management not having done anything right for the past few years. This leaves me wondering whether these commentators have realized that the current CEO and chairman, Daniel O'Day, joined Gilead only in March 2019. And O'Day has made significant changes to the rest of the management team as well, so I consider this often-heard complaint to be unjustified.
Daniel O'Day has considerable experience in executive roles of a leading pharmaceutical company. His career at Roche spanned more than three decades, during which he held several executive positions, including the CEO position of Roche Pharmaceuticals. You can read more about some operational changes that he has initiated at GILD here.
There are multiple reasons why I like what Daniel O'Day has done for Gilead so far. The first reason is the smaller acquisitions and collaborations that O'Day has orchestrated, and that have been briefly discussed above. O'Day has not aimed for a huge takeover which necessarily brings many uncertainties and risks for shareholders. On the other hand, he has also been far from idle, sitting on the cash pile available to him and letting growth remain stagnant. Instead, I feel that the initiatives he has undertaken with respect to M&A complement Gilead's current portfolio well and offer significant future prospects while not being too demanding on cash.
The second reason is how the Remdesivir situation was treated. The opportunity that Remdesivir may represent a helpful treatment for COVID-19 was immediately recognized and seized, and appropriate measures for scaling up production and shortening manufacturing time were taken. At the same time, communication was never inappropriate or stirred up unjustified hopes, a trap that a lesser CEO certainly might have fallen into. In particular, there were no dumb comments regarding pricing, which might have led to public backlash. I also consider the decision to give away a large number of Remdesivir treatments for free to be a smart move in this unprecedented situation. Substantial revenues may be generated later, or not - the positive publicity has been worth it already, in my opinion. Personally, I am comfortable with whatever approach management will take in the future with respect to Remdesivir and feel confident that management knows what's the right path.
The third reason is harder to pinpoint. I just like the general communication style of Gilead since O'Day has taken over. This comprises the Remdesivir communication, the answers on the earnings call Q&As which have a feel of reassurance and confidence to it, and also the earnings call presentations. For instance, the Q1 2020 earnings call presentation is a great round-up of Gilead. Overall, I really like Gilead's management and deem it to be able to bring Gilead to new heights in the future.
Gilead pays a quarterly dividend of $0.68 per share, which translates to a yearly dividend of $2.72 per share and a dividend yield of 3.51% based on the share price of $77.06 as of Wednesday's close. I consider this to be an attractive reward for holding the stock of a well-established large pharma company which is in good (or arguably great) shape.
Even better, the dividend was hiked by 8% compared to the previous quarter. In difficult times like these, in which many companies aim for a token hike or even outright cut their dividend, such a significant increase exhibits great confidence by management and its commitment to shareholder returns. Moreover, the dividend growth CAGR from 2016 (when the dividend was initiated) up to 2019 is 11.05%, which looks very attractive from a dividend growth perspective. Additionally, in the Q1 presentation, management reassuringly confirmed its intent to maintain and grow the dividend over time regardless of COVID-19.
Still, based on what I see on SA, the stock is flying under the radar of most dividend growth investors compared to other pharma/biotech stocks. This certainly mostly traces back to the short dividend history of Gilead. However, during this history, the story is flawless and recently reinforced by the latest increase and management communication. Moreover, Gilead's very little net debt position and its payout ratio of 43% should leave plenty of room for further low double-digit or high single-digit increases as long as the business performs decently.
However, shareholder yield does not stop here, and in fact, dividend returns have paled in comparison to share buyback yield recently. During Q1 2020, Gilead repurchased over 18 million shares, leading to a repurchase amount of $1,328 million (compared to $874 million expenditures for dividends). If share buybacks were to continue at that speed, we would be talking about an annual shareholder yield approaching 9% here!
The buybacks are based on a $12 billion share repurchase program authorized in 2016, under which ~133.8 million shares had been bought back for a total of $9.9 billion as of Q1 2020. An additional $5 billion share repurchase program was authorized in 2020, meaning that around $7.1 billion are remaining in these programs, indicating a commitment to considerable future share buybacks and thus shareholder returns.
This yield is a major factor why I consider Gilead to be one of the most interesting investment opportunities right now. How many other recession-resistant, pandemic-proof stocks sport a quickly growing 3.51% dividend yield supported by fundamentals and significant share buybacks?
Another thing I often read in the comments section on Gilead articles is people complaining about how Gilead has produced negative returns for them during the last few years. My answer is simple: These people bought Gilead at the height of the HCV bubble (when it was overvalued), and since then, Gilead has gradually transformed to a cheaply stock, ready to deliver alpha in the years to come.
Why do I consider Gilead to be cheaply valued? Let's just have a look at its P/E ratio. Gilead sports a non-GAAP FWD P/E ratio of just over 12, with the S&P 500 trading at a lofty FWD P/E ratio of 24. A P/E of 15 is often considered to be a fair price for a normally growing company, which I believe that Gilead will continue to be in the future. Moreover, it could also be argued that Gilead should trade at a premium, for instance, due to its size (market cap around $96 billion), its acyclical business model, potential Remdesivir upside, and its significant dividend yield/shareholder yield.
People might state that AbbVie and Bristol-Myers Squibb (BMY) are trading at even slightly cheaper valuations, with their non-GAAP FWD P/E ratios sitting below or at 10. They would be right, and I do consider both of these companies to also be attractive investment opportunities right now (they are well-known for their dividend growth prospects, in contrast to Gilead). However, it also needs to be taken into consideration that both of these companies are currently dealing with massive takeovers (Allergan and Celgene, respectively) and suffer from a high debt load. Gilead, on the other hand, only has a net debt load of around $3 billion (and possesses an A credit rating from S&P).
As the following chart shows, Gilead is at an attractive valuation point. It has come down more than 10% from its recent highs (around $86) and has not participated in the market's breathtakingly furious rally during the last weeks. My guess is that this again stems from an irrational focus of investors on Remdesivir, fearing that a defeat of COVID-19 may diminish future Remdesivir revenues, and basically not taking into account the remainder of Gilead (which, in fact, comprises probably >90% of its value).
Besides the risks acknowledged in Gilead's 10-K (available for download here), I want to emphasize a few risks for investing in Gilead.
The first risk, ironically, is related to Remdesivir. The medial focus is very much on Remdesivir, and thus, albeit in my opinion mistakenly, such also is the focus of many investors. This means that negative news in this regard (e.g., unconvincing results in further studies, slow uptake, over successful competing drugs) may put downward pressure on the stock price. However, I do hope this article shows that Gilead is much more than Remdesivir, and thus, I see this risk more as a possibility for short-term price declines than a fundamental issue.
The second risk concerns Gilead's severe dependence on the HIV franchise (as a reminder, it contributes three quarters of revenue). While the company is a leader in the space, it anticipates that its currently available drugs will be prescribed (and protected by patents) into the 2030s and actively researches further drugs to treat HIV, the possibility of another company (e.g., GlaxoSmithKline's (GSK) ViiV) developing a superior treatment (or even a cure) cannot be discarded. If this were to occur, Gilead's revenues and earnings would suffer considerably.
A third risk that I want to point out is that pharmaceutical pricing and reimbursement pressures may reduce Gilead's profitability. This was a heavily discussed topic prior to the COVID-19 pandemic, but I do think that the pandemic itself as well as Gilead's handling of Remdesivir have alleviated this issue: Right now is certainly not the best time for politicians to propose reduced healthcare spending, in particular with respect to antivirals, and Gilead in particular should have earned some goodwill with the free Remdesivir doses.
Overall, it is certainly necessary to keep these risks in mind when considering a position in Gilead. However, assessing them as well as the potential reward has let me comfortably build up a mid-sized position in Gilead within my diversified portfolio.
Gilead is a recession-resistant, pandemic-proof stock with a quickly growing 3.51% dividend yield supported by fundamentals, significant share buybacks as well as undemanding valuation, and I rate the stock a definitive "BUY" here. It fits perfectly well into a dividend growth portfolio, but, due to its defensive nature, complements almost all portfolios at a time in which the general market appears to be very richly valued.
Thanks for reading. Revised on Wednesday, the 10th of June 2020, Gilead's closing price: $77.06.
This article was written by
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.
Alexander Schiller is neither a certified financial advisor nor in any way licensed to give financial advice. Even though this article may seem like investment advice or a recommendation to buy or sell stocks or other securities, it simply represents an opinion. Do not buy or sell stocks or other securities based on the article - perform your own due diligence prior to any investment. Investing in stocks carries significant risk, which may lead to total loss of invested capital. The information presented in this article represents the author's knowledge and opinion based on thorough research and analysis, but no guarantee for the correctness, currency, completeness and consistency of the information is given. The author owns shares of Gilead Sciences.
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