Gilead Sciences: Finally A Breakthrough (NASDAQ:GILD)

In October of last year, I concluded that Gilead Sciences (NASDAQ:GILD) was becoming a cure with non-Covid-19 product sales being relatively strong. This was desperately needed as a fairly aggressive acquisition strategy in recent years has not played out (yet). Appeal was still seen in my eyes, even as higher interest rates were rapidly creating a compelling alternative for the juicy dividend.

A Quick Recap

Gilead´s fortunes changed in a huge way after the company acquired Pharmasset in an $11 billion deal, a deal which allowed the company to cure HCV. This deal and the success of the drugs sent shares of Gilead to the $100 mark, with shares trading at just $20 early in 2012.

The huge momentum created a tough set-up, more so because HCV actually provided a cure. Offsetting some of the headwinds from declining HCV sales, inevitable given the curing effects, Gilead has seen a growing HIV business over time. This allowed it to provide largely flattish sales and earnings results for the overall business.

The company used the windfall profits to try to ignite growth, having pursued quite a few expensive deals. This includes a $21 billion deal for Immunomedics (through which Gilead obtained ownership of Trodelvy), a $12 billion deal for Kite Pharma (involving the ownership of Yescarta), as well as the purchase of Forty Seven and Galapagos.

Revenues came in at $27 billion in 2021, the second year in a row in which revenues were up on an annual basis. The problem sits with the composition of sales as Gilead’s Covid-19 drug Veklury added $5.5 billion in sales. Adjusted for this, product sales came in at $21.5 billion, actually coming in flat for a while now.

These sales were mostly generated by the HIV franchise, with $16.3 billion in product sales being the backbone of the business. HCV sales had fallen to just $2 billion, HBV/HDV sales rose modestly to a billion, with cell therapy sales up in a spectacular fashion to half a billion. Adjusted earnings came in at $7.28 per share in 2021, with net debt of $20 billion looking quite manageable. The original 2022 guidance was a bit soft, with product sales seen at $24 billion (including a $2 billion Veklury sales component), as adjusted earnings were expected to come down to $6.45 per share.

2022 – Solid

First quarter sales rose 3% to $6.6 billion with non-Covid-19 product sales up 2% to $5.0 billion, driven by growth in the cell therapy business. Second quarter sales were up a percent to $6.3 billion, yet underlying growth was strong. As Veklury sales fell 46% to $445 million, that implies that non-Covid-19 sales were up 7% to $5.7 billion, driven by accelerating sales in the cell therapy business.

The company hiked the sales guidance to a midpoint of $24.75 billion, driven by a higher anticipated Veklury sales contribution, as well as other core product sales. The earnings guidance was only hiked in a minor fashion to $6.55 per share. The company used some of the operating momentum to acquire UK-based biotechnology business MiroBio in a $405 million deal, acquiring the remaining worldwide rights of Trodelvy as well in a $280 million deal.

Based on a mere 10 times earnings multiple, a fat 5% dividend yield, and encouraging news on the core business, I obviously saw appeal, even as I have been too upbeat on Gilead too early, perhaps too long.

Coming To Life

Since October, shares have come to life in a huge fashion. A $62 stock early in October has risen to $83 per share, up a third in the time frame of just a few months, marking a huge move in a choppy market environment.

The big driver behind the move was very strong third quarter results even as total revenues fell 5% to $7.0 billion. Non-Veklury sales rose 11% to $6.1 billion as this strength attracted interest from investors. The company hiked the midpoint of the full-year sales guidance from $24.75 billion to $26.05 billion, a $1.3 billion hike, about nine hundred million attributed to higher Veklury sales but also higher non-Covid-19 product sales.

The HIV franchise has seen a decent quarter, HCV sales returned to year-over-year revenue growth, as cell therapy and Trodelvy sales growth were quite strong at nearly 80%. Cell therapy sales now trend at $1.6 billion a year with Trodelvy posting sales of $700 million. Combined, these two segments now make up 10% of sales, growing revenues by around 80%, resulting in solid sales growth, and making a real contribution to overall sales growth. The company now sees adjusted earnings a few pennies above the $7 per share mark, looking quite good.

On the back of this news flow, shares have risen precipitously during October and November, as the earnings report was complemented by some FDA and EMA approvals as well, creating some positive news on that front, as well as some tie-ups with EVOQ among others.

What Now?

Despite a huge 30% rally, the overall valuation multiple increase has been limited as earnings estimates have risen 10% as well. The resulting 20% growth means that earnings multiples have risen from 10 to 12 times on the back of stronger growth, operational momentum, and more approvals.

This is very encouraging as it sets the company up for growth in 2023, certainly as recent dollar strength has reversed a bit, with currencies likely providing some tailwinds in the near term. Moreover, growth outside HIV makes the business more diverse, avoiding the pitfall of too much concentration (like was the case with HCV in the past), as net debt has been coming down to $18.3 billion again. Given all of this, I see no reason to alter my long position, although a big rip higher makes it tempting to balance out some of the position.

That said, I stick with my long position, waiting and anticipating a further valuation re-rating, seeing a clear roadmap for shares to move to the $100 mark this year.