In-line with my previous predictions, Gilead’s (NASDAQ:GILD) remdesivir appears to be an effective treatment for the novel coronavirus. However, given my continued concerns about potential competition from a cheaper drug, hydrochloroquine, and the increase in the price of GILD stock, I’m less upbeat on the shares than I was previously.
Nevertheless, I still think the stock’s risk-reward ratio is attractive and continue to recommend buying the shares.
New Data
In an April 23 column, I noted that “after receiving (Gilead’s) drug at a Chicago hospital, only two patients out of 113 with severe cases of the virus died.” And on April 10, a study in the New England Journal of Medicine reported that 17 of 30 patients “of those on mechanical ventilation were” taken off ventilation.
After those two data points were released, I was 90% to 95% certain that Gilead’s remdesivir was effective against the coronavirus. After all, researchers found that almost 90% of coronavirus patients on ventilators died, so the fact that more than 50% of patients taking remdesivir had come off ventilation was quite impressive. And nearly 6% of all of those who have been diagnosed with the virus in the U.S. have died. So a fatality rate of less than 2% among patients with severe cases was quite impressive.
But that data on remdesivir was widely viewed as invalid by investors and scientists because it was not derived from randomized studies with control groups. So the April 30 announcement by the federal government’s National Institute of Allergy and Infectious Diseases, or NIAID, showing that remdesivir had significantly helped Covid-19 patients was quite important.
The study showed that patients with “advanced” coronavirus who had taken the drug had “recovered in an average of 11 days,” versus 15 days for those taking a placebo. According to NIAID, the “results also suggested a survival benefit, with a mortality rate of 8.0% for the group receiving remdesivir versus 11.6% for the placebo group.”
A decrease of 3.6 percentage points in the fatality rate seems quite meaningful to me, although it’s not technically statistically significant. Still, the fatality rate in the NIAID study was disappointing because it was much higher than the rate indicated by the Chicago data.
But on a positive note, the NIAID head, Dr. Anthony Fauci, sounded quite impressed with the data, calling it “quite good news.” Fauci added that “the mortality rate (of patients taking remdesivir) tended towards being better” and he said that there was “clear-cut evidence that the drug works.” Importantly, Fauci stated that remdesivir would be “the standard of care” going forward, indicating that it would soon be approved by the FDA. And indeed, the agency granted its authorization for the drug on May 1.
Gilead Can Make Significant Money on Remdesivir
Some have questioned whether remdesivir will generate meaningful revenue for Gilead. The company has agreed to donate 1.5 million doses of the drug, which, according to Newsweek, “could amount to 140,000 treatment courses.” But, just in the U.S., there are, as of this writing, 1.1 million known cases of coronavirus. Worldwide, there were more than 3.5 million confirmed cases.
Further, as I’ve reported previously, remdesivir protected monkeys from being infected with Middle East respiratory syndrome, another coronavirus. So it’s quite possible that the drug will prevent humans from catching COVID-19. As a result, it could be given to front-line healthcare workers and people who are particularly vulnerable to COVID-19, such as nursing home residents, as a protective measure.
Finally, many governments are likely to look to stockpile the drug for use in combating future outbreaks of COVID-19 or other coronaviruses.
On its first-quarter earnings conference call, the company anticipated that it could make 1 million 10-day rounds of the drug by the end of the year. But its recent research showed that five-day rounds were as effective as 10-day rounds.
Given the information I cited above, Gilead could easily sell all 2 million five-day rounds it will produce by the end of the year. After subtracting the 140,000 rounds it’s providing for free, that amounts to 1.86 million. At a hypothetical, average price of $1,000 per person, that equates to $1.86 billion.
The company added that it could produce several million more rounds of the drug next year. Even if there is a vaccine for Covid-19 next year, I think governments and hospitals will buy those rounds of remdesivir to prepare for another possible coronavirus. Those purchases could easily generate $3 billion of revenue for Gilead.
Gilead’s total revenue in 2019 was $22.4 billion, so remdesivir could move the needle for GILD stock.
Hydrochloroquine Is Still a Meaningful Threat
Multiple individual doctors enthusiastically touted the benefits of hydrochloroquine, an old, very cheap drug, as a treatment for the coronavirus.
However, a recent study by the Department of Veterans Affairs found that the drug did not provide any benefit, and the FDA recently issued a warning on using the drug outside of hospitals. But there has been criticism of the VA study, which was led by an ophthalmologist, and other data is likely to be released on the drug’s efficacy as a treatment for the coronavirus soon.
The Bottom Line on GILD Stock
I’m more cautious on the shares after they climbed in the wake of the NIAID data which showed a lower mortality benefit than I had expected. Meanwhile, hydroxycholoroquine remains a possible threat to remdesivir.
Still, Fauci sounds enthusiastic about remdesivir, and the FDA’s warning on hydroxycholoroquine indicates that it’s not very upbeat about the drug. Further, remdesivir could very well boost GILD stock to around $130 to $140. Meanwhile, the shares are unlikely to drop much below the $68 level at which they were trading as of the beginning of February.
As a result, the stock’s risk/reward ratio is positive, making a small or medium position in the shares worthwhile.
As of this writing, Larry Ramer owned shares of GILD stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
