Gilead Sciences Inc. (GILD, Financial) is an American pharmaceutical company specializing in developing and commercializing medicines to treat patients with HIV, large B-cell lymphoma, chronic hepatitis C virus, chronic hepatitis B virus and Covid-19.
Investment thesis
In recent weeks, the company's share price has continued to move sideways despite rising sales of its drugs, which remain among the leaders in the global HIV and cancer therapeutics markets.
In the two-hour time frame, there remains an unclosed gap in the price range from $78.22 to $80.4.
Source: TradingView
We expect that financial market participants will be looking to close it in the coming weeks as Gilead's portfolio of product candidates continues to expand at a relatively high pace. Moreover, many of its medicines demonstrate high efficacy in treating the most common cancers, such as breast cancer, non-small cell lung cancer and metastatic urothelial cancer.
Source: Global Cancer Observatory – IARC
In addition, Gilead's third-quarter financial results, released on Nov. 7, exceeded our expectations. As a result, the company's management increased the 2023 revenue guidance from a range of $26.3 billion to $26.7 billion to between $26.7 billion and $26.9 billion, including due to increased demand for Yescarta, Biktarvy and Trodelvy. Also, despite the decline in media interest in Covid-19, we expect demand for Veklury (remdesivir), the first Food and Drug Administration-approved drug to treat patients with coronavirus, will increase in the fourth quarter relative to the third quarter due to increased hospitalizations.
Source: The Centers for Disease Control and Prevention
Despite the active reasearch and development and merger and acquisitions policies pursued by Gilead's management, its total debt continues to decline from year to year. At the end of September 2023, it was about $24.98 billion, down by $826 million compared to the end of 2022.
Author's elaboration, based on GuruFocus and Seeking Alpha data.
We initiate our coverage of Gilead Sciences with an "outperform" rating for the next 12 months.
The financial position of Gilead Sciences and its prospects
Gilead Sciences' revenue for the third quarter of 2023 was $7.05 billion, exceeding our expectations by about $100 million and, more importantly, up 6.8% from the prior quarter.
Moreover, the company's actual revenue beat analysts' consensus estimates in nine of the last 10 quarters, which may indicate financial market participants are underestimating the commercial prospects of its FDA-approved drugs and product candidates. We believe that Daniel O'Day, as CEO of Gilead, is doing an excellent job in the current period of increased competition in the global HIV treatment market, thanks to the company's innovative product, Biktarvy.
Biktarvy (bictegravir/emtricitabine/tenofovir alafenamide) is a medicine approved by regulatory authorities for the treatment of patients with HIV-1 infection.
Author's elaboration, based on the press releases.
The mechanism of action of the Gilead product is complex because it consists of three active substances. So bictegravir is an integrase strand transfer inhibitor (INSTI), which helps prevent the formation of the HIV-1 provirus and the spread of the virus throughout the patient's body. Emtricitabine is a nucleoside reverse transcriptase inhibitor (NRTI), thereby preventing the transcription of HIV RNA into DNA. Also, tenofovir alafenamide is a nucleotide reverse transcriptase inhibitor, which inhibits viral synthesis.
Biktarvy sales were $3.09 billion in the third quarter, an increase of 11.5% year over year. The main reasons for the rise in demand for it are its extremely high efficacy in the fight against HIV infection and also Gilead's desire to switch patients from its other drugs to Biktarvy since some of them will lose exclusivity in the next three years.
Author's elaboration, based on quarterly securities reports.
Additionally, the growing demand for Gilead Sciences' oncology products has become the second key contributor to the improvement of its financial position. Their combined sales were $769 million, an increase of 32.9% year over year, driven primarily by increased demand for Yescarta (axicabtagene ciloleucel), an anti-CD19 CAR T-cell therapy for the treatment of patients with certain types of large B-cell lymphoma and relapsed or refractory follicular lymphoma.
At the same time, sales of Trodelvy (sacituzumab govitecan-hziy) amounted to $282 million for the three months ended Sept, 30, an increase of 56.7% from the previous year due to growing demand in Europe and the United States for the treatment of patients with breast cancer.
Author's elaboration, based on quarterly securities reports.
Ultimately, we believe Gilead's growth in oncology products is beneficial for its business growth, allowing it to reduce its significant financial dependence on HIV drugs and also increase the company's share in the multibillion-dollar cancer drugs market.
Gilead Sciences is expected to release financial results for the fourth quarter of 2023 on Feb. 2, 2024. According to Seeking Alpha, the company's revenue for the quarter is anticipated to be $6.87 billion to $7.25 billion, up 4% from analysts' expectations for the third quarter of 2023.
Author's elaboration, based on GuruFocus and Seeking Alpha data.
Simultaneously, according to our model, Gilead's total revenue will be above the median of this range and reach $7.12 billion. Its quarterly and year-over-year revenue growth will be driven primarily by increased demand for its HIV medicines, Yescarta, Vemlidy and Trodelvy.
Created by author.
We expect Gilead's operating income margin to reach 35.1% in 2023, which will be significantly higher than its crucial health care competitors, such as Sanofi (SNY, Financial), GSK (GSK, Financial), and AstraZeneca (AZN, Financial). On the other hand, this financial metric will increase to 37.2% by 2024, mainly due to the reduction in the cost of raw materials needed to manufacture its products, increased demand for Biktarvy, and the label expansions of two of its key drugs, such as Trodelvy and Yescarta.
Source: Gilead Sciences
Gilead's non-GAAP earnings were $2.29, an increase of 20.5% year over year, mainly due to increased demand for its drugs aimed at fighting cancer and HIV infection. Increased sales of these products partially offset increases in R&D and administrative expenses and also lower sales of Epclusa, Letairis and Odefsey.
According to Seeking Alpha, Gilead's fourth-quarter earnings are expected to range from $1.64 to $2.04. Besides, we anticipate the company's earnings to be above the median of this range and reach $1.95, an increase of 16.8% compared to the previous year.
Author's elaboration, based on GuruFocus and Seeking Alpha data.
At the same time, Gilead's trailing 12-mont non-GAAP price-earnings ratio is 11.64, which is 34.83% lower than the sector average. Moreover, the forward non-GAAP price-earnings ratio is 11.45, which is one of the factors indicating that financial market participants continue to remain conservative about Gilead's prospects despite the growth of its margins and the relatively high rate of expansion of its portfolio of experimental drugs.
Conclusion
The key risks we highlighted for the company are the negative impact of the Inflation Reduction Act, increased competition in the global HIV drugs market and the FDA's investigation into the severe risk of T-cell malignancy in patients receiving CAR T-cell therapy.
Despite the potential risks, Gilead's operating income margin continues to grow quarter over quarter, it has a robust pipeline of product candidates targeting cancer, its total debt is declining year over year and its management is pursuing aggressive R&D and M&A efforts aimed at reducing its financial dependence on sales of HIV medicines.
We initiate our coverage of Gilead Sciences with an outperform rating for the next 12 months.
