Gilead Sciences (NASDAQ:GILD) just got a huge boost from the World Health Organization (WHO), They said that Gilead’s new experimental drug remdesivir may be the best candidate to treat the new coronavirus that’s spreading globally. The impact on GILD stock is colossal. It is up 10% since the end of January and is likely to move much higher.
China has started clinical trials with Gilead’s remdesivir. Results may be available in a few weeks. But the hypothesis is that the drug may have efficacy, according to a senior WHO executive. If so, that could mean billions in sales for Gilead.
Potential Implications for Gilead From Its Coronavirus Drug
If you want an example, in 2009 Roche (OTCMKTS:RHHBY) sold $3.2 billion worth of the influenza treatment Tamiflu during the H1N1 pandemic. Barron’s reports that the drug could be made quickly on an emergency basis.
There are two factual reasons why analysts are upbeat about remdesivir’s potential.
For one, animal testing has suggested it is active against other coronavirus strains such as MERS and SARS.
Secondly, an infected Washington State man improved the following day after taking remdesivir, according to Barron’s.
On Tuesday, CNBC reported that the U.S. is planning a clinical trial run by the University of Nebraska Medical Center. The National Institute of Allergy and Infectious Diseases will also run the test in 50 sites globally.
It’s also getting two trials in Wuhan, China — the epicenter of the outbreak. But declining cases there have slowed enrollment.
A dozen other companies are also trying to test their drugs. Moderna (NASDAQ:MRNA) has shipped the first batch of its potential vaccine to the NIAID to start human trials. MRNA stock is up 21.6% since a recent low on Jan. 8.
What This Means For GILD Stock
GILD stock is very cheap, trading at just 10.9 times forward earnings, according to Seeking Alpha. Moreover, it has a healthy dividend yield of 3.9%. These points alone make it look very attractive.
However, even if Gilead could figure out how to commercialize its coronavirus drug, and even if it made $3 billion in revenue, this could boost sales by 13%. Analysts expect it to make $22.4 billion in sales in 2020.
That may not move the needle much for GILD stock since it is not clear how much of that sales boost would translate in profits. This is because emergency sales could cost a lot to produce.
Nevertheless, the demand for the drug could significantly boost the company’s overall finances, including a net positive to its cash flow and cash. It would also produce a new line of revenue for the company. Gilead makes most of its revenue from HIV related drugs.
Gilead’s Free Cash Flow Could Lead to Stock Price Gains
In fact, Gilead makes a huge amount of free cash flow. In 2019 Gilead generated over $8.3 billion in free cash flow. That represents an incredibly high 9.4% of its $88 billion market value.
So if even half of the new potential sales of the coronavirus drug turn into free cash flow, that would raise free cash flow to $9.8 billion. This could bring the stock’s FCF yield to 11.1%.
That could push GILD stock up significantly. For example, at a more normal level of 9% FCF, it would be worth $109.1 billion. That works out to $86.18 per share, or 23% higher than today’s price.
Either way, look for Gilead to do quite well if its coronavirus drug turns out to be a winner.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers get a two-week free trial.