Looking at Gilead Sciences, Inc. (NASDAQ:GILD), one is likely to have some cognitive dissonance. The trouble investors have seems to be in reconciling the two rather distinct business models that comprise it and the fundamentals underlying GILD stock.
There is the finite hepatitis C business and the growing HIV business. As chronic hepatitis C (HCV) products and HIV antiviral treatments made up 92% of full-year 2016 revenue, it’s safe to say these are the two areas to analyze when considering GILD’s future.
Gilead’s drug development pipeline is concentrated in booming areas like oncology. But until these drugs make it over all the regulatory hurdles, I don’t ascribe much value to them when valuing GILD stock.
Certainly not in comparison with a $14.8 billion HCV franchise value.
GILD’s Hep C Business
Gilead got into the HCV franchise with its 2012 purchase of Pharmasset. Two of its medicines — Sovaldi and Harvoni — have dominated the market due to high cure rates and minimal side effects. GILD has gotten so good at curing Hep C that this has caused a peak in revenue to be behind them.
HCV was a $19.1 billion segment in 2015 but brought in only $14.8 billion last year. The contribution should continue to fall given that HCV is a cure market, meaning treatment is final. This is unlike HIV, where patients continue to take the drugs throughout their lives.
Management admits as much, noting in the annual report that they saw “rapid uptake of products after launch as patients who had been awaiting new options sought treatment, followed by a deceleration of demand as that group completed treatment. This caused our HCV and total revenues to increase dramatically from 2013 to 2015 and then decline in 2016.”
Merck & Co., Inc. (NYSE:MRK) came out with its own Hep C drug, Zepatier, last year and has seen good prescription increases. While growth in Europe and Japan may help offset competitive pressures, ultimately this is a shrinking business.
HIV Requires Lifelong Meds
HIV is where the growth is. HIV infection has evolved from a fatal and debilitating disease into a chronic, manageable condition. That implies that medicine must be taken for the remainder of patients’ lives to stay healthy, resulting in an annuity-like revenue stream for GILD.
It is, unfortunately, a growing market, as UNAIDS noted:
“Between 2010 and 2015, there was a 57% increase each year in new infections in eastern Europe and central Asia. The numbers of new infections had been dropping for years in the Caribbean, but over the same period they rose annually by 9%. The annual rise in the Middle East and North Africa was 4% and in Latin America it was 2%.”
GILD has a number of HIV drugs. In 2016, six of them did over a billion dollars in annual sales, and the top two — Truvada and Atripla — did $3.6 billion and $2.6 billion, respectively.
I think the HIV business alone can contribute around $5 a share in earnings next year. And with the franchise growing in the high single digits, 16-18x seems a fair multiple. The middle of that range gets to a conservative $85 per share.
And that’s just the HIV business alone.
So, at the current GILD stock price, you’re essentially getting the HCV business for free, not a bad deal considering it will still generate cash flow, just less and less of it in the coming years.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
