Gilead Sciences

Growing again!

2024 was an annus horribilis for the healthcare sector. Some say the industry is poised for a turnaround this year, while others believe the headwinds will persist.

For me, as a stock picker, headline numbers don’t mean all that much. I did just fine last year. Gilead Sciences (GILD) appreciated by 10%, and Abbvie had a return of 12%. I also advocated pairing back in Merck when the stock price was over $125. Now, I think Merck could be a good buy again. Novo Nordisk had a lost year in the stock market. Amgen, my last stock pick, has not worked so far, but it is early days.

In sum, it's not a catastrophe, and at the start of 2025, these companies look cheap from a valuation perspective. You can’t expect equally strong performance from all parts of your portfolio in any given year. Pharma stocks tend to outperform when the overall market struggles. So, we need some patience here, in due course, these stocks will work.

Strategic stock selection offers the most effective approach to navigating the pharmaceutical sector. Let's revisit GILD, a company that warrants attention due to its market leadership in virology.

HIV prevention

GILD’s strong performance in recent months can be assigned to Lencapavir. This new drug is so effective in preventing HIV that it works almost like a vaccine. Anyhow, the patient has to inject the medicine twice a year.

In layman's terms, Lencapavir sticks to viral HIV cells as glue. There it blocks the door, preventing HIV from entering other cells. Eventually, the super glue causes viral cells to break down, disrupting virus assembly and infection. Unlike other treatments, Lencapavir sticks around for a long time, providing extended prevention.

GILD applied for FDA approval last month. Approval is expected to come sometime this year. Given the strong clinical results, we can expect fast approval. Global approval is also expected to follow fairly shortly.

Based on various analyst projections and market estimates, Lenacapavir is expected to generate significant revenue. Peak sales estimates range from $3 billion to $4 billion globally. The drug's success in clinical trials, particularly its 100% efficacy in HIV prevention for cisgender women, contributes to these optimistic forecasts. These numbers can be compared to Descovy, GILD’s current prevention medicine, which brings in around $2 billion in revenue. Currently, Lencapavir has no competitors. None has come up with anything that even comes close to the drug in efficacy.

Hepatitis

Historically, GILD is best known for being the absolute best in Hepatitis treatments. In revenue terms, liver disease is far less important for GILD today than it once was. Still, GILD takes in around $2 billion in revenues from its Hepatitis drug portfolio yearly, so it's not insignificant. There are many rare liver diseases out there awaiting new drugs.

Last year's news was GILD’s acquisition of Cymabay. With this acquisition, GILD took control of Seladalpar, an innovative therapy developed by Cymabay to treat primary biliary cholangitis (PBC).

PBC is a viral infection that slowly scars liver tissue, gradually affecting its ability to do its job. Early detection and treatment are crucial to maintain liver health and prevent serious complications.

Seladalpar, named Livdelzi by GILD, is estimated to garner around $700 million in peak yearly revenues. The drug far surpasses any other treatments currently in the marketplace.

Finally, it is worth mentioning here that last year GILD broke new ground in developing antiviral therapies for reducing the long-term incidence of primary liver cancer in people with chronic HBV (Hepatitis B). These developments expand the therapeutic offerings and reinforce GILD’s position as a pioneer in addressing liver health challenges.

Oncology

GILD released a series of clinical trial news in December. I will categorize these releases as slow and steady progress rather than game changers. Oncology product sales grow at around 6% on an annual basis. However, it is worrying that GILD’s cell therapies have stopped growing. So far, GILD has produced an acceptable result from acquiring Kite and Immunomedics. Maybe GILD should look for more takeover candidates. If GiLD is serious about growing its oncology treatment faster than other parts of its business, it might need to broaden its portfolio with help from the outside.

Growing again

My fair value estimate is $115. Wall Street price targets have crept up to my estimate lately, currently sitting between $95 and $105 among most analysts. And deservedly so, de facto reflecting that GILD has raised its revenue growth guidance from 1% at the beginning of the year to 4% for 2024 at the latest earnings release. Still, most analysts underestimate GILD’s pipeline, especially within HIV.

The fluctuating point in valuing GILD is how you judge the strength of the oncology portfolio. My view on this might seem a bit speculative, but I emphasize stated goals above all else. Gilead's leadership has set an ambitious target: to have oncology therapies constitute one-third of the company's revenues by 2030. This goal underscores the importance of the oncology segment to the future growth strategy. I think GILD’s management will work things out and reach its goal.

Will GILD’s CEO Daniel O’Day convince Wall Street at the JP Morgan Healthcare conference in San Fransisco on January 13?

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The information in this blog is for educational purposes only, not financial advice. Investing in stocks carries risks; past performance doesn't guarantee future results. Conduct thorough research and seek advice from financial professionals before investing.

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