Gilead—Down but Not Out?

Published: May 11, 2018 By

Gilead

You know when an analyst starts an article with, “Gilead’s Q1 financial results were a disaster,” that it requires a closer look.

But it is hard to argue with that conclusion. For the first quarter, Gilead reported total revenues for the first quarter of $5.088 billion, compared to the same quarter in 2017 of $6.505 billion. Diluted earnings per share dropped from $2.05 to $1.17 in the same period.

What’s slamming the company, and it’s no real surprise to anyone following the industry or the company, is sales of its drugs for hepatitis C (HCV). In the first quarter of 2018, HCV drugs brought in $2.576 billion. In the most recent quarter, they brought in $1.046 billion. And everybody knows why, too—Gilead’s drugs for HCV are so effective, they are basically curing the disease, causing there to be a smaller and smaller patient pool to draw on. There’s some chipping away at that market from competitors, and pricing pressures, but the biggest erosion is caused by their own success.

Otherwise, sales for its HIV and Hepatitis B (HBV) products were slightly up. In the first quarter of 2018, sales from those products were $3.329 billion compared to $3.265 billion in the first quarter of 2018. But the HIV sales of are being hit by competition as well, which is why “Shock Exchange” wrote for Seeking Alpha, “Atripla and Truvada sales fell 29 percent and 18 percent, respectively. These HIV regimens are being cannibalized by Genvoya and Descovy which generated over $1.4 billion in sales during the quarter. Of note is that Biktarvy, a once-daily single-tablet regimen for the treatment of HIV, generated $35 million during the quarter. Biktarvy is expected to help beat back threats from GlaxoSmithKline’s two-drug HIV combo. The lion’s share of Biktarvy sales was generated by switches from Genvoya and HIV regimens from GSK. It was launched during the quarter and could be the next catalyst for Gilead’s HIV franchise.”

In short, Gilead, one of the dominant players in anti-viral drugs and drugs for liver diseases, is a victim of its own success in HCV and facing complicated challenges for the HIV market, although still a dominant player there.

Is it likely to be downhill from here?

Probably not, although it may never be the dominant company it was. Maybe. But there are several things to take into consideration.

Oncology

Gilead closed on its acquisition of Kite Pharma for $11.9 billion in October 2017. Kite focuses on immuno-oncology, specifically chimeric antigen receptor (CAR) and T-cell receptor (TCR) therapies. Shortly afterward, the U.S. Food and Drug Administration (FDA) approved Kite’s Yescarta for advanced lymphoma. Many analysts and investors think Gilead overpaid for the company, but only time will tell. Yescarta may be only the tip of the iceberg for the company’s foray into immuno-oncology.

NASH

NASH stands for non-alcoholic steatohepatitis, which basically means cirrhosis of the liver for people who don’t drink alcohol much. It is one of the biggest unmet medical needs in the U.S. and worldwide in developed countries. It is related to the obesity epidemic and at this time the only real treatment is diet and exercise. Yet it is a liver disease, which is one of Gilead’s areas of expertise.

Currently Gilead has three anti-NASH drug candidates: Selonsertib (GS-4997), GS-0976 and GS-96774. “First Genesis Consulting,” writing for Seeking Alpha, discusses NASH in-depth, but what is key to understanding NASH is that it appears to have several components: inflammation, fibrosis and steatosis, or retention of lipids. Many researchers believe treatments for NASH will require addressing each of those components, likely with a cocktail of medications.

And Gilead has drugs for all of them in their pipeline. “First Genesis Consulting” notes, “The variety of putative anti-NASH therapeutics under development is like a ‘buffet’ where there is something for everyone. This is important and needed since NASH is characterized by the significant needs for monotherapies as well as combination therapies that will limit, dampen and quench the deleterious multifactorial symptomatic effects of this disease. … In my humble opinion, the ‘one pill fits all’ therapeutic approach to NASH is not a plausible approach but monotherapy and/or combination therapies that target synergistic pathways to block different aspects of NASH pathogenesis should be considered a winner or a front-runner.”

HIV

Gilead is still a dominant player in the HIV market, but like the HCV market, may start to become a victim of its own success. Although there is no “cure” for HIV, per se, it has become a largely manageable chronic disease through a cocktail of HIV medications. And there are some hints that upcoming cocktails being evaluated by Gilead and other companies may actually cure the disease, eradicating the hidden reservoirs of the virus.

Matthew Zeeta, writing for Seeking Alpha, says, “The biggest risks I see are how much of their valuation going forward is tied to HIV (if assuming a very quick drop for HCV as we did) and overall drug price reform. The first risk is very real as Gilead has controlled a large portion of the HIV market for a long time. While this is a competitive benefit in some ways it also leaves them vulnerable if some other company came up with an HIV cure or just even a much better product.”

Cash

Another reason investors shouldn’t abandon Gilead, at least in the long term, is money. The company has almost no net debt and expects to repatriate $28 billion in cash due to the opportunities afforded with recent tax legislation. With no debt and a large war chest, the company should be able to buy its way into some innovation, if it wants to. The question is, which area? HIV? Liver diseases? Immuno-oncology, an area rife with opportunities, or some other area?

Zeeta writes, “I fully expect they will do a combination of using this cash to continue to increase the dividend, resume an increased level of buybacks seen in 2015 and 2016, and maybe even make smaller purchases to continue to bolster their pipeline.”

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