Shares of Gilead Science have been held hostage due to the vagaries of the HCV business. The shares blasted through $100 as the initial sales ramp for its suite of HCV meds took the market by storm. The record revenues posted in 2015 proved to be unsustainable, however, as the curative nature of the treatment meaningfully decreased the eligible pool of patients much to the benefit of society. The Street subsequently punished shares of Gilead as the equity made a near roundtrip back down the high $60’s. The investment community has maintained a near-maniacal obsession with the HCV pipeline with the latest fear of a new competitor stealing share. Let’s examine these key points a bit further.
By Alexander J. Poulos
JP Morgan Healthcare Conference Serves as a Near-Term Catalyst
The JP Morgan Healthcare conference is a week-long affair featuring over 450 private and public healthcare companies. The conference offers a unique platform, allowing executives to detail the progress over the past year. Many have utilized the conference to offer forward guidance or release critical new data. The conference, in our opinion, can have market-moving ramifications. We were not at all disappointed as Gilead Sciences (GILD) provided some assuring 2018 guidance.
The executive making the presentation was John Milligan, the CEO of Gilead who seized the opportunity to provide interesting color on the market dynamics of the HCV marketplace. We’ve always viewed the HCV market as a lucrative yet wasting asset that will spin-off copious amounts of free cash flow with minimal additional capital spending. We based our opinion on the recent new HCV product approvals with a slightly shorter overall course of therapy as the final product to address the HCV market. Gilead discontinued additional research in the field as the current therapies were deemed sufficient to handle the epidemic. With the absence of R&D dollars devoted to additional follow-up therapies, the HCV product suite has become a proverbial cash cow that will remain an important, but ever-shrinking, percentage of Gilead’s revenue and profit.
The share price of Gilead sold off post the enthusiasm garnered via the acquisition of Kite Pharma this summer. The sell-off has intensified post the third quarter earnings release where yet again the focus was placed on the FDA’s approval of Mavyret which can treat all six genotypes in as little as eight weeks. The fear is a new competitor will enter the HCV market which may further depress prices, thus placing additional pressure on Gilead’s revenues and profitability. Milligan, in a few eloquent sentences, vanquished this notion, helping to quash investor fears.
But as we enter 2018, we consider that the marketing — the pricing has become stable. So for 2018 and beyond, we think the market prices will be stable. We think that the market share will be split between 2 companies, and we’ll see how we battle out between ourselves and our competitor, AbbVie. And a more predictable but slightly declining patient flow into the future. So what this means for Gilead is HCV will be an important component of what we do. It will be a smaller component of what we do, and we think that the growth in our HIV and other businesses will be the main driver of what you’ll see for Gilead going into the future.
Source: JP Morgan Jan 8th, 2018 conference
The emergence of a stable pricing regime for the HCV market would be a welcome occurrence for payers and providers alike as it allows for greater visibility and treatment flexibility. One of the greatest challenges is projecting demand, thus allowing for adequate resources to pay for the therapy. From a provider’s perspective, enhanced visibility will allow the management team at Gilead greater insights into the dynamics of the marketplace while allowing for more accurate quarterly guidance. We feel the team at Gilead may have gotten a bad rep for their inability to provide quarterly guidance.
Pivot to the Clinical Pipeline
The relentless focus on the declining HCV marketplace has overshadowed the crown jewel of Gilead’s product portfolio—namely the HIV franchise and the exciting CAR-T line acquired via the takeout of Kite. Let’s offer our overview of each division.
Gilead continues to expand its dominance in the field of HIV with the recent approval of TAF-based products such as Genvoya. The newly-formulated combination therapies have expanded the lifecycle of the HIV franchise, thus helping to support continued growth. GlaxoSmithKline (GSK) remains a distant second place, but GSK hoped to jumpstart its flagging sales via a new doublet therapy marketed under the tradename Juluca. Juluca is a combination of GSK’s Tivicay and Merck’s (MRK) Endurant into a single once a day dosage. The issue with Juluca is the doublet itself—by not adding an additional nucleoside reverse transcriptase inhibitors, GSK is leaving the door open for possible resistance, a non-starter for clinicians. GSK’s in-house NRTI’s have a problematic side-effect profile, thus allowing Gilead to dominate the market with its far better-tolerated product suite.
Gilead has utilized one of the priority review vouchers it acquired to expedite approval of Bictegavir in combination with emtricitabine/tenofovir alafenamide to form a potent triplet therapy. We feel the new formulation with an expected higher price tag and longer total patent life will allow Gilead to increase its HIV franchise revenue stream meaningfully. The PDUFA date for the triplet therapy is February 12, 2018—less than one month away!
In our view, the most exciting portion of the Gilead investment thesis is the potential of the oncology division now that a viable CAR-T therapy has been added to the fold. Gilead’s ambition in oncology has been well-documented, but leading up to the Kite acquisition a rather futile affair, as Zydelig is a costly commercial flop due to an unacceptable level of toxicity along with a host of phase two failures.
2018 will mark Gilead’s maiden voyage in the CAR-T field as it begins the roll-out of Axicabtagen ciloleucel the novel treatment acquired in the Kite Pharma purchase. We expect the initial ramp to take time as additional infusion centers are brought into the fold. We do not expect the treatment to have a meaningful impact on revenue in 2018. Instead, we view it as a key piece of the clinical pipeline going forward. We expect the treatment will receive additional indications which will expand the overall patient population.
Image Source: Gilead Sciences
The management team at Gilead should be commended for wisely purchasing a platform technology instead of spending its tremendous cash hoard for a few interesting assets. While the investment community has clamored for a deal during the past few years, the management team’s reluctance of overpaying has paid off in spades as Gilead has now vaulted past Novartis (NVS) into the lead in the CAR-T field. In essence, by writing a very large check, Gilead has accomplished its long-held goal of making a splash in the field of oncology—Well Done!!!
Role of the Dividend
Though there are many ideas out there, we think Gilead represents a unique asset in the biotech field as it combines the appealing aspect of a rich pipeline (which appeals to growth-oriented investors), while satisfying the demands of income-oriented investors with a hefty current quarterly payout of $0.52 per share ($2.08 annualized) for a yield north of 2.5%.
Gilead initiated its dividend in 2015 with an initial payout of $0.43 per share, which it subsequently raised to $0.47 in 2016. Gilead’s dividend-hike history suggests that an increase in the second quarter is likely. The nearest biotech competitor that can emulate the dividend history of Gilead is Amgen (AMGN), in our view, but we remain less-than-enthused with the progress of the clinical pipeline at Amgen. It is not very often we include a company in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio, but we feel the near-term income attributes of Gilead combined with the promise of the pipeline bodes well for future share price appreciation and income growth.
Independent Contributor Alexander J. Poulos is long Gilead Sciences.
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