Quicky #5 on Gilead

This is part #5 on Gilead Sciences, Inc. of which I own shares (GILD US) since a few years without doing a thorough company analysis so far. The share price of GILD saw a recent high of $84 on remdesivir hopes in late April, but is now at a multi-year low of $60. Time for me to take a look …

This is not investment advice. Please read the disclaimer.
I currently own shares in mentioned companies.

Gilead Sciences. Inc. (the company, or Gilead) is a $ 75 bn market cap research-based bio-pharmaceutical US company. Gilead discovers, develops, and commercializes therapeutics, primarily in the areas of HIV, AIDS, liver disease, and cardiovascular diseases (CDV: heart and blood vessels).

This is another part of my series of Quickies on new companies.

The stock (GILD US) is at a 52w low trading at $ 60 after it touched $ 84 in late April on hopes for remdesivir. It sports a trailing 13x P/E and a fwd 9x P/E and shows a 4.5% dividend yield. It has a very nice recent history of dividend increases and a huge cashpile that should support further dividend increases.

The general problem with pharma companies is that every few years they face increased competition whenever a block-buster medicine patent expires and generec manufacturers enter the stage fighting for market share. Usually, a products top line is strongly affected and margin erosion sets in. Effects on the individual product can vary widely. Gilead is no execption to the rule and faces the same industry problems.

Financial resources are impressive and Gilead puts them to use. According to Gileads 2019 financial highlights, it generated total sales of $ 22 bn, reinvested 9 bn in R&D, payed dividends of 3 bn and did share buy backs for almost 2 bn (SBC somewhat dilutes that number but outstanding shares a declining for years). As of June 30, 2020, Gilead is was still very cash rich with $21.2 billion of cash, cash equivalents and marketable debt securities (Q2 results), before accounting for the $ 21 bn immunomedics acquisition.

In Q2, Gilead generated sales of $ 5.1 bn, down from 5.7 yoy. Further it earned an adjusted $ 1.11 per share (down from 1.72 yoy), the difference to GAAP EpS of -2.66 is mainly due to an amortization charge for an acquired in-process R&D asset (from Forty seven acquisition). Furthermore, Gilead revised its guidance upwards for FY 2020:

• Sales guidance was increased
• R&D expenses will increase, partially due to remdesivir studies
• diluted adj EPS guidance was increased to $6.25-7.65 (up from 6.05-6.45 from Feb)
  • though with a pretty wide range
  • midpoint of $6.95 (+11%), for an indicated 9x P/E (6.25 indicates a 10x P/E)

A massive portfolio of call options is always nice to have as an investor (SoftBank seems to agree on that 😀 ). In my view (and it could be wrong!), a big part of Gilead can be seen as exactly that. Gilead invests massively in its future and its R&D pipeline. This is achieved by quarterly R&D expenses of about $ 1 bn (10-Q for 2020 Q2, p3). Additionally, Gilead enters into partnerships with other companies, sometimes involving milestone payments, and is a very active buyer of firms, acquiering equity stakes or whole companies. The bullets below give you a first impression. You can find many more scrolling through Gileads press releases:

• Immunomedics, $ 21 bn (Sept 2020)
• Option to Acquire Tizona and 300m equity invest (July 2020)
• Partnership with Arcus (July 2020)
• Option to Acquire Pionyr (June 2020)
• Forty seven acquisition, 4.9 bn (March 2020)
• Kite Pharma acquisition, 11.9 bn (2017)
• The 11 bn Pharmasset acquisition (2012) gave Gilead the amazing HCV franchise. HCV revenue peaked at $19 bn in 2015 sending the stock higher ($117 in 2015).
  • Because GILD introduced a cure for HCV (not merely an ongoing treatment), the number of patients spiked rapidly beginning in 2013.
  • After the pent-up demand worked its way through the system, the number of new patient starts declined rapidly.
  • The revenue and longer-term outlook for the blockbuster treatment deteriorated (and the stock with it).

Gilead profits from cheap financing when doing its acquisitions. In September, Gilead priced $ 7 bn of senior unsecured notes on favorable terms for its 21bn acquisition of Immunomedics.

In the short term, Gileads earnings could be negatively affected by the pandemic when therapies are delayed due to risk and capacity. Remdesivir could surprise on the positive side, with many governments buying it as kind of insurance (preparing for emergency) with uncertainty about its efficacy remaining. Demand seems growing and Gilead is ramping up production volumes, including third party producers. The meds efficacy is still up to anyones guess and widely discussed! But I believe chances are (a) there is some positive effect and (b) it gets bought anyway. News on remdesivir is mixed:

• On Oct 8th, the CEO wrote an open letter unveiling further positive clinical results for remdesivir and its many advantages regarding the fight against the pandemic for patients, their families, hospitals and society.
• The WHO found that Remdesivir has little effect on Covid-19 mortality. My humble opinion (to be discounted!):
  • many countries have limited intensive care units (ICUs) capacity that could be way less than needed in second or third waves
  • In this case, shortening the period of days a patient ‘blocks’ an ICU is ciritcal and a reduction (through remdesivir) is a real benefit.
  • Even more so, when you add limited trained personnell into the picture
• In general, doing remdesivir studies is problematic (not giving it to patients in need)

Attention! I am not an expert on any pharma or healthcare topic. It could be that my assessment of several discussed topics is grossly wrong. My trust in the company’s future researched-based and commercial success is partially based on the Pharmasset acquisition, which could just have been due to luck (resulting in a personal bias?). Gilead derives most of its sales and profits from a few key products and sales are mostly generated in US. This results in high(er) political and commercial risks.

Longer term Gilead’s product portfolio will evolve and partially renew. My base case assumes growing earnings and dividends per share and ongoing share buy backs and above average capital allocation by management on the basis of solid cash generation. New treatments would hopefully offset declining sales and profits from other products! But …

if Gilead hits another home run, this could be tremendously beneficial for the company, its patients and its shareholders. Looking at past success and its massive R&D investments, I actually guess such a bull-case scenario is not very unlikely (>25%) in the longer term. For example, Gilead invested heavily in its Oncology pipeline via Kite and forty seven acquisitions for the development of effective treatments of cancer. Of course

a downside scenario could materialize for Gilead (and investors) as well. In this bear case several things go south and developments do not live up to (management’s) expectations. Profit margins, could be adversely affected by political campaigns. Soaring rates of jobless people could lead to less demand for expensive treatments with a lakc of insurance coverage in place (like Europe). But, even in this case, I would most likely still receive some dividends, earnings and neither the stock would go to zero. Overall, I do not think this case is too likely, maybe less than 30%.

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I think about adding to my GILD position before Gilead will release Q3 results on October 28, 2020. I believe that the risk/reward proposition is quite favorable. But, this assessment is based on a high-level analysis only, without doing a detailed company analysis, which I believe would not add much value when performed by me (missing domain knowledge).

• I placed a limit buy order at € 50.91 ($ 60.40) which was filled today (Oct 20) shortly after the US market open.

I hope you enjoyed this post.

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