Gilead: A Hold Despite Cancer Advance, Remdesivir, Dividend

Summary

• The Veklury (remdesivir) bolus will resemble the prior Hepatitis C bolus.
• Gilead's pipeline is promising, but past failures cast doubts.
• The dividend is solid, that is the main attraction.

Gilead Sciences (NASDAQ:GILD) is a large-cap, long-lived, biotechnology pharmaceutical company with a broad array of commercial therapies plus a broad pipeline. In Q4 2020, Veklury provided a boost, which should continue until at least Q2 2021. An antiviral used to fight COVID-19 infections, at some point sales will taper off drastically, at least in nations where immunizations knock the pandemic back.

This resembles the situation a decade ago when Gilead introduced its Hepatitis C treatments. That produced a revenue and stock price spike, followed by a long, if slow, down trend. I think there is a lot of promise in the Gilead potential product pipeline, but failures in that pipeline over the last few years have made investors cautious. I have long owned Gilead and continue to reap the dividend. I believe that holding is the best strategy, as the stock price could also capture positive news from the pipeline.

Because Gilead is a large, complex company, this article will focus on a few features that are currently central to my thesis. After briefly reviewing Q4 2020 results I will look at recently revealed Biktarvy and Yescarta data and two of my favorite pipeline therapies. I will also summarize why investors feel burned by past pipeline failures, which is the main reason I think we could be undervaluing the company.

Data by YCharts

Q4 2020 Results and the Dividend

Gilead Sciences Q4 2020 revenue was $7.42 billion, up 26% from $5.88 billion in Q4 2019. GAAP EPS was $1.23, down from $2.12 year-earlier. Non-GAAP income was $2.19, up from $1.10 year-earlier. The reason GAAP and non-GAAP numbers essentially switched places in the course of a year is largely related to accounting for acquisitions. The dividend is currently $0.71 per quarter, so whether compared to the GAAP or non-GAAP Q4 numbers, clearly it is well-covered by earnings. The yield at the closing stock price of $64.33 on March 9, 2021 was 4.39%. Gilead recently increased the dividend for Q1 2021, for stockholders of record on March 15.

At the end of the quarter Gilead had cash and equivalents of $7.91 billion. During 2020 $25.7 billion was used for acquisitions, leaving the company with $38.8 billion in long-term liabilities. Unless something goes very wrong, it looks to me like cash flow should be enough to continue paying the dividend as well as reduce debt, given that full-year cash flow from operations for 2020 was $8.2 billion.

Veklury Bolus?

As with the revenue numbers coming in for companies like Moderna (MRNA) with approved COVID-19 vaccines, it is likely a mistake to project the revenue too far out into the future. An example from the past is Gilead's cures for Hepatitis C infections. Being first to market, there were many patients waiting for an effective cure. Gilead ran up some impressive revenue numbers. But competitors entered the market, insurers asked for and got more competitive pricing, and the number of patients declined.

The Hep C business is still a good one for Gilead, but if you look at this stock chart, you can see the peak for the stock price back in 2015. On the other hand, Gilead's stock price is still well above where it was in 2012, and it has paid a nice dividend this entire time.

Data by YCharts

Looking at Veklury (remdesivir), sales were about $873 million in Q3 and $1.94 billion in Q4 2020. That is a nice chunk of money to use for acquisitions or pipeline investments, and some of it is going for the dividend raise mentioned above. I would expect another $2 billion or so in Q1 2021, followed by a decline that stems from vaccinations. Take the $1.94 million out of Q4 revenue and Gilead's revenue was down 7% y/y.

The main problem for the stock price going forward is that come Q4 2021 through at least Q2 2022, the y/y comps are going to be difficult. That can discourage investors. So what Gilead, and current investors, would like to see is new sources of revenue to make up for the Veklury declines that are likely at some point in 2021.

New Biktarvy and Lenacapavir Data

Biktarvy for HIV infections, currently Gilead's best-selling drug, reported new positive data on March 9. The data from Phase 3 Biktarvy open-label extension studies showed undetectable viral loads in over 98% of patients who remained in the study for 4 years. No strains of HIV resistant to the drug emerged. While this result does not expand the label to new patient types, it does reinforce Biktarvy as the top choice for most patients with HIV and may encourage patients to switch to it from competitors' drugs.

In the HIV pipeline one promising drug, Lenacapavir, reported positive data on March 9. In the Phase 2/3 trial of difficult-to-treat patients 73% achieved undetectable viral load. While this is below that just mentioned, Biktarvy is a combination therapy of three drugs. This data is for Lenacapavir alone. It also represents a new class of therapy, capsid inhibitors. It is long-acting, rather than requiring a daily pill. It will likely eventually be a part of a combination therapy. The ultimate goal is to find some therapy that produces a cure, so that the virus does not return in a patient when the therapy stops. There are other drugs being tested in the pipeline with that goal in mind.

New Yescarta Approval

On March 6 Gilead announced it had received FDA approval for Yescarta for follicular lymphoma that is relapsing or refractory. This is the third type of cancer approved in the U.S. for Yescarta. Follicular lymphoma is not a particularly common type of cancer, and there will be competition from non-CAR T therapies already on the market or in development. Still, it should accelerate Yescarta sales, which were $129 million in Q4 2020, up just 6% y/y. The main drawbacks so far for CAR T therapies, which tend to be very effective, is their high cost and tendency to produce side effects.

Other Pipeline Highlights

Both from internal development and by acquiring outside therapies and companies, Gilead has built an extensive pipeline. Here I will just mention two I think investors should consider as likely value drivers. See the Gilead Pipeline page for a broader view.

Tecartus (Brexu-cel) represents a substantial expansion of Gilead's cell therapy cancer program. In December 2020 the EU granted Tecartus conditional marketing authorization for relapsed or refractory mantle cell lymphoma. Tecartus is a CAR T therapy developed by the Kite subsidiary. While mantle cell lymphoma is rare, this is another indication of how important cell therapies are likely to be to oncology in this decade.

Magrolimab is a monoclonal antibody against CD47 currently in a Phase 3 trial for myelodysplastic syndrome, which affects about 15,000 new patients each year in the U.S. It was acquired as part of Gilead's purchase of Forty Seven for $4.9 billion earlier in 2020. If approved for this indication it could generate significant income and looks like it could see label expansion over time. The intellectual property from Forty Seven could be synergistic with the cell therapy program of Gilead's Kite subsidiary.

Historic pipeline failure and the stock price

In addition to the Hepatitis C bolus related above, there have been other events in recent history that have conditioned investors to be cautious about projecting too much value into the Gilead pipeline. The two important examples for me are the NASH (NonAlcoholic SteatoHepatitis) debacle and the Galapagos tribulations. In each case a period of optimism and higher stock prices was followed by a reality check and lower stock prices.

Every pharmaceutical company that lasts long enough will see increased competition for its therapies, including generics or biosimilars when patents expire. Gilead has been around for decades, avoiding a decline in its core business, HIV therapies, by bringing out new, improved therapies that mostly were better than those brought out by competitors. After the Hepatitis C bolus, the next big thing for Gilead was NASH therapies.

Checking out the current pipeline, there is still one under development, Cilofexor and firsocostat in combination, in Phase 2 trials. Earlier drugs with promising Phase 1 results failed to achieve sufficient effectiveness in later stage trials. In analyst conferences lately Gilead management has largely stopped commenting about NASH, though Cilofexor is also in a Phase 3 trial for sclerosing cholangitis.

The collaboration with Galapagos once generated considerable excitement. Filgotinib is the first part of that. While it did receive EU approval for rheumatoid arthritis, and still is in the Gilead pipeline for ulcerative colitis and Crohn's disease, it simply did not generate data that is sufficiently competitive in the anti-inflammatory therapy market. At the end of 2020 the companies amended their collaboration for filgotinib following negative feedback from the FDA for its use as a rheumatoid arthritis therapy.

Gilead will, however, receive royalties for sales in Europe. On February 10, 2021 the companies announced they discontinued trials of ziritaxestat for idiopathic pulmonary fibrosis. Gilead still owns more than 25% of outstanding shares of Galapagos, which has significant R&D capabilities and its own pipeline. The companies will continue to collaborate on developing that pipeline.

Conclusion

Given the history explained above, I understand analyst and investor reluctance to credit Gilead with future value before we see the actual revenue from new products from the pipeline. For dividend seekers who want some potential stock price upside this creates an attractive situation. The risk to the dividend appears minimal. The upside from the pipeline could be considerable if Gilead's batting average improves. I am currently happy to collect the dividends on my shares, and despite some past disappointments, hope for an upside as sales of newer products ramp and new data comes in from the pipeline.

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.