I’m more convinced than ever that those who are bearish on Gilead’s (NASDAQ:GILD) treatment for the coronavirus in particular and on GILD stock, in general, will be proven wrong.
The bears have expressed several reasons for their pessimism on the company’s coronavirus treatment, remdesivir. These reservations have kept Gilead’s shares from truly breaking out. Here are the bears’ main arguments and the reasons why I believe they don’t hold water.
Many bears actually believe that, because the company agreed to donate the first 140,000 rounds (each round is enough to treat one patient) of the drug, that it plans to give away unlimited amounts of the treatment.
The Bears and GILD Stock
I think that there were a few reasons for Gilead’s decision to give away the first 140,000 rounds of remdesivir. Just as many internet companies like Netflix (NASDAQ:NFLX) and Zoom (NASDAQ:ZM) offer free trials of their products to demonstrate that they work and provide value, Gilead wanted to quickly show hospitals, patients and governments that remdesivir is effective before seeking payment for it.
Secondly, Gilead, which has been criticized in the past for excessive prices, wanted to build up goodwill before asking governments and insurers to pay for the drug.
And finally, in an environment in which many companies are giving away drugs and other products that are being used to combat the coronavirus, Gilead would indeed have been harshly criticized if it charged for remdesivir immediately.
Once the drug is widely shown to be effective, however, any reservations about paying Gilead for it will be swept aside amid widespread clamoring by the public for governments and insurers to do whatever it takes to procure huge amounts of the treatment.
Meanwhile, Gilead’s actions strongly suggest that it doesn’t plan to continue giving away remdesivir. If it intended to keep providing the drug for free indefinitely, why wouldn’t it have said so already, in order to reap as much good publicity and goodwill as it could from the gesture? And the drug maker is already looking to make licensing deals with overseas companies. If Gilead had decided to give away the drug in perpetuity, why would it waste time on negotiating licensing deals?
Making Money on Remdesivir
Gilead has said that it can produce 1 million rounds of the drug by the end of this year.
The Institute for Clinical and Economic Review, which uses a variety of metrics to determine fair prices for drugs, estimated that remdesivir should cost $4,500 per round.
Since Gilead is likely to be criticized nearly as much if it charges $2,000 per round as if it charges $4,000 per round, I expect the company to charge close to $4,000 per round in the U.S., Japan and Europe, i.e. developed nations. For simplicity’s sake, though, let’s use $4,000 per round. I estimate it will sell about 800,000 rounds at full price this year. That works out to $3.2 billion.
I believe that its average selling price for the other 200,000 rounds, which will be licensed or donated for use in developing nations, will come in at $1,000. That’s another $200 million. That takes us to $3.4 billion in 2020.
Gilead has said that it can produce “several million” rounds of remdesivir in 2021. I estimate that, in the first half of the year, before a vaccine can likely be very widely administered, the company will sell another 1 million rounds to the developed nations, again at an average price of about $4,000 per round. That’s $4 billion of revenue.
It will license or donate another 1 million rounds to developing nations at an average price of about $1,000, producing another $1 billion of revenue. In the second half of the year, after a vaccine can likely be widely administered, I predict that Gilead will sell another 2 million doses to governments for stockpiling, at an average price of $2,000 per round. That’s another $4 billion of revenue.
So I estimate that Gilead’s 2021 revenue from the drug will be around $9 billion. That would be nearly 40% of the company’s 2019 revenue. Of course, that amount of revenue would certainly move the needle for GILD stock
Bears are pointing to the fact that, in a U.S. government-sponsored study, the drug failed to lower the fatality rate by a statistically significant amount. But patients taking the drug had a survival rate of 8%, versus 11.6% for those taking a placebo.
I’ll admit that I’m more of a conceptual thinker than a mathematics whiz and that statistics was far from my best subject in school. Having said that, a 3.6 percentage point benefit sounds pretty meaningful to me. And indeed, NIH said that “the results… suggested a survival benefit.”
Moreover, in two separate studies and one report, the drug’s performance sounded much better. Specifically, as I reported in an earlier column, “after receiving the drug at a Chicago hospital, only two patients out of 113 with severe cases of the virus died.”
Finally, a Gilead-sponsored study found that 8% of patients with “severe manifestations of COVID-19” who received a ten-day dose of remdesivir died.
Although that was the same mortality rate as the NIH-sponsored study, the distinction between the NIH’s study of “hospitalized” COVID patients and Gilead’s study of “severe” COVID patients is, I think, important. That’s because some hospitalized patients may not have truly severe cases of the virus.
There’s evidence that those with severe cases have mortality rates ranging from 28%-62%. In that context, the 8% mortality rate that Gilead reported among the severe coronavirus patients sounds very impressive. It should be noted that none of the patients who received remdesivir in Gilead’s study were on a ventilator when the study began.
Given all the data I described, I think there’s a good chance that the NIH study will ultimately prove to be a negative outlier, with remdesivir ultimately lowering the mortality rate of patients with severe cases by 20-30 percentage points.
The Bottom Line on GILD Stock
Remdesivir is set to be a blockbuster for Gilead. But due to the bears’ inaccurate arguments, the shares don’t yet fully reflect the drug’s value. Consequently, I recommend that investors buy the shares.
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.