Gilead Sciences: Strategic Gains From Lenacapavir And Trodelvy Justify A Buy Rating (GILD)

mouu007Overview I last looked at Gilead Sciences (NASDAQ:GILD) in February, following their acquisition of liver disease developer CymaBay Therapeutics. I concluded that while the newly acquired seladelpar (PDUFA date of August 14 for primary biliary cholagitis) made sense for Gilead, the price they paid seemed steep. I ended with a hold recommendation. Since then, the company has reported Q1 earnings and a clinical victory in twice-yearly HIV PrEP therapy. First, let us go over some background with Gilead. The company, once lauded for its dominance in antivirals for HIV/hepatitis C, is looking for new growth opportunities. Over the last decade, its stock has remained flat (see image below), owing primarily to increased competition in the HIV/hepatitis C treatment landscape (limiting revenue growth) and the company’s slow and costly pivot to other therapeutic areas, such as oncology. Data by YChartsTwice as Nice: Gilead’s Biannual Breakthrough in HIV Battle Gilead recently announced Phase 3 data from a lenacapavir injection administered twice a year to prevent HIV infection (pre-exposure prophylaxis or PrEP). Lenacapavir proved to be 100% effective in HIV prevention in thousands of South African and Ugandan women. Lenacapavir was compared to Gilead’s own once-daily oral PrEP therapy, Truvada. The PrEP market for HIV is anticipated to grow to $3.3 billion by 2029. Lenacapavir will most likely compete in the market with orals such as Truvada and another injectable, long-acting [LA] cabotegravir, which is administered monthly for two months and then every two months. ViiV Healthcare markets cabotegravir LA, which costs $22,000 per year, and estimates that “200,000 people currently taking PrEP in the United States” and “1.2 million” could benefit from PrEP. Lenacapavir from Gilead may have an advantage here if it is perceived to be superior to cabotegravir LA. It clearly outperforms it in terms of dosing frequency, which is significant because treatment compliance is critical to PrEP (any disruptions could result in infection). Upon a Google search, analyst peak annual estimates for lenacapavir generally range between $1.5 billion and $4 billion. I think these are reasonable, with an estimate closer to the middle being the most likely event ($3 billion). So, this is a big deal, and the market responded by giving Gilead’s stock a 12% boost, which is no small feat for an $88 billion company and seemingly prices in the revenue expectations for lenacapavir. Lenacapavir will likely join a robust portfolio of HIV products that includes Biktarvy and Descovy, both of which are blockbuster drugs. Q1 Earnings Biktarvy and Descovy delivered $2.9 billion and $426 million in sales, respectively, for Q1 ’24. Total HIV product sales were $4.3 billion in Q1, a 4% increase compared to the same period last year. The “liver disease portfolio” delivered sales of $737 million in Q1. Veklury, an antiviral utilized against COVID, saw revenues drop 3% to $555 million. For their cell therapy products, Yescarta, Tecartus, and Trodelvy delivered $380 million, $100 million, and $309 million in revenue in Q1, respectively. Trodelvy’s growth is notable, increasing 39% year-over-year. Recall that Trodelvy was originally developed by Immunomedics. Gilead acquired the company in 2020 for approximately $21 billion. Trodelvy is an ADC that targets Trop-2 and is approved for metastatic triple-negative breast cancer and metastatic urothelial cancer. The former indication is notoriously aggressive and difficult-to-treat, but Trodelvy’s unique profile (combining a monoclonal antibody that targets Trop-2 with a chemotherapy agent, SN-38) offers hope. Total Q1 revenue came in at $6.686 billion, up 5% year-over-year and beating analyst estimates by $350 million. The operating loss for Q1 was $4.322 billion. However, this was driven by one-time charges related to the CymaBay and Immunomedics acquisitions. Otherwise, the company generated $2.2 billion in “net cash provided by operating activities” and $2.1 billion in free cash flow after subtracting capital expenditures. Financial Health As of March 31, Gilead had $4.718 billion in cash and cash equivalents. Total current assets were $14.041 billion, with total current liabilities of $13.015 billion. This results in a current ratio of just over one, indicating that the company can reasonably meet its short-term obligations. Gilead has a current portion of long-term debt and other obligations of $3.667 due within the next 12 months. Their long-term debt totals $21.527 billion. While Gilead is highly leveraged, I don’t suspect that they’ll run into any short-term issues so long as they generate cash, which is reasonably assured due to their diverse portfolio of blockbuster drugs. Risk/Reward Analysis and Investment Recommendation Lenacapavir gives Gilead another blockbuster drug and solidifies the company’s leadership in HIV treatment. Furthermore, Trodelvy’s strong market performance early on suggests that the costly Immunomedics acquisition will bear fruit. In terms of reward, these two therapies offer a lot of potential for future revenue growth. Seladelpar, expected to receive FDA approval in August, is expected to dominate the ~$1.5 billion primary biliary cholagitis market. So, there’s a lot to like here on top of Gilead’s healthy 4%+ dividend yield. AuthorIn terms of risk, Gilead carries a lofty, but reasonable, debt load. Any changes in revenue could make it difficult for the company to pay off its debt, leading to liquidity issues. Moreover, markets like HIV and oncology are very competitive. New incumbents like lenacapavir may not perform as well as some believe. Lastly, Trodelvy’s ability to expand into other indications will be key to the Immunomedics acquisition paying off. The ADC recently failed a Phase 3 NSCLC trial. In conclusion, I believe we are finally seeing some positive signals in GILD, and it is likely to outperform the risk-free rate over the next four years. As such, I think it’s time to upgrade my recommendation from hold to buy. As always, investors benefit from maintaining a well-diversified portfolio to mitigate the idiosyncratic risks associated with Gilead

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