Long-time Gilead Sciences (NASDAQ: GILD) shareholders (like yours truly) have been on quite the rollercoaster ride. The company has seen its market cap cut in half from its 2015 highs.
With a dividend yielding around 3% and plenty of cash on the books for an acquisition or three, the key question is whether the price drop presents a compelling buying opportunity.
To answer that question, we need to examine whether the buy thesis around Gilead remains intact.
The core business is steady
HIV and HBV (Hepatitis B) revenue was flat year-over-year last quarter at $3.3 billion. That fact that it’s flat isn’t great news, exactly, but it makes sense: Gilead has been retooling its drug lineup to replace tenofovir disoproxil fumarate (TDF) in its drug cocktails with Tenofovir Alafenamide (TAF), a drug with similar efficacy and a better side-effect profile. Gilead has successfully switched 65% of its HIV patients to a TAF-containing regimen, which is a good move given that patents on its TDF-containing cocktails are beginning to expire in the US and Europe.
As you’re probably guessing, the introduction of TAF into its lineup was a largely defensive move by Gilead to protect market share against competitors like ViiV Healthcare’s Triumeq. (It’s hard to have a big growth business when, like Gilead, you’re the incumbent in the market, with over 70% market share in the US.) That said, there are signs that TAF is helping Gilead seize additional market share and turn HIV into a slow-growth opportunity. In Q4 of 2015, just over 70% of treatment-naive HIV patients started with a Gilead cocktail — in Q4 of 2017 (the most recent quarter available), that number was 81%.
One of Gilead’s other big growth opportunities is pre-exposure prophylaxis (or PrEP), a program providing Truvada (one of its older cocktails) for HIV prevention. There are currently 167,000 people in the program, and Gilead is testing out Descovy (one of its new cocktails) for the same indication. Should it succeed, that will be another long-term growth driver for the company.
Hepatitis C has fallen off a cliff
If you’d asked me two quarters ago, I would have said that Hepatitis C (or HCV) was part of Gilead’s core business. But with HCV drugs only bringing in $1.0 billion in sales last quarter — down an astonishing 59% year-over-year, continuing a years-long decline — HCV seems to have been relegated to also-ran status.
This collapse has been particularly surprising because Gilead Sciences management had been signaling that things had begun to stabilize in the most recent couple of quarters, yet revenue fell a staggering 30% quarter-over-quarter. In all fairness, management had noted in Q4 of 2017 that they expected full-year Hepatitis C revenue to fall from $9 billion last year to between $3.5 billion and $4 billion this year, so this isn’t entirely unexpected. But I had hoped it was Gilead’s typical conservatism in predicting the future.
So how does Gilead return to growth?
The really frustrating thing about Gilead right now is that it has a plausible path to growth…but it will be a while before we know whether this year is the trough year or just the latest in a string of annual declines. Gilead has big opportunities to potentially treat both NASH (or nonalcoholic steatohepatitis) and cancer, but it’s unclear just how well it will be able to execute, and how many patients its drugs will ultimately treat.
Starting with NASH: Gilead’s lead drug candidate, ASK1 inhibitor selonsertib, has a pair of phase 3 trials that are expected to read out in the first half of 2019. If all goes well, that translates to management filing for approval in late 2019 and receiving a (hopefully positive) FDA decision in mid-to-late 2020. In a best-case scenario, that would imply that the drug starts getting to real sales volume in late 2021, with peak sales probably happening a couple of years later.
That’s a long time to wait. Fortunately, Gilead is also testing some combination therapies in NASH that will hopefully feed investors some tantalizing morsels of data in the meantime. NASH is a multi-component disease, and Gilead’s management believes that a combo therapy will be the best way to treat it…if they can just find the right one. Gilead is beginning a phase 2b study of a combo therapy that should read out in 48 weeks (following up on a 12-week study that showed good safety data). NASH is an expensive disease with a sizable patient population, so it’s a great opportunity for Gilead if management has found the right mechanisms of action.
The cancer opportunity is largely centered around the CAR-T platform Gilead acquired when it bought Kite Pharma. That’s not to denigrate Yescarta, Kite’s lead CAR-T drug — an RBC Markets analyst predicts the drug could hit $2.7 billion in peak annual sales. But Yescarta, like other first-generation CAR-T drugs, has a pretty nasty side-effect profile, and the real opportunity will be what second- and third-generation CAR-T drugs look like. Gilead’s cancer pipeline is, on the whole, not nearly as advanced as its NASH pipeline, but it’s a huge long-term opportunity.
My thesis on Gilead was predicated on the assumption that HCV would stabilize at a much higher base, and that relief from outside acquisitions would come a lot sooner. Personally, I’m not as excited by the company’s pipeline after some fairly high-profile difficulties — most notably cancer drug Zydelig’s nasty side-effect profile and NASH hopeful simtuzumab’s spectacular flameout.
I’m not seeing nearly as much of a value proposition as I once did with Gilead. I don’t see the company as a compelling buy anymore, and I’m not even sure I’ll continue holding my shares.
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