A Look at Gilead Sciences Stock After Its Recent Weakness (NASDAQ:GILD)

Gilead Sciences (NASDAQ:GILD) is down 15% YTD, significantly underperforming the market. We last covered the company two months ago, discussing how it is turning around. The company has been hit by tough Trodelva’s research results, another disappointment given the company’s $20+ billion acquisition of Immunomedics. Still, the company has the ability to leverage its assets to generate strong returns while supporting profitability >4%.

Gilead Sciences Q1 2024 Findings

The company reported a strong financial result in Q1 2024, although some research results, such as Trodelva, were disappointing.

The company has managed to increase sales of non-Veklury products year over year. The company’s oncology division has performed particularly well, but after years of expensive acquisitions, the company still needs to grow. Yescarta is another acquisition worth almost $12 billion, finally exceeding $1 billion in annual sales 7 years later.

Still, the company has an impressive R&D arm that we’d like to see grow. The company needs to build a sustainable portfolio beyond HIV to drive long-term shareholder returns.

Gilead Sciences 2024 Milestones

The company has a number of exciting events ahead in 2024.

Of particular note is the difficult results the company has had with Trodelvy, which led to a 10% price drop earlier this year. Given the more than $20 billion the company paid for Trodelvy, the company must eventually reach billions of dollars in annual sales for the drug to justify the investment. It has surpassed $1 billion, but it still has a long way to go.

The company continues to achieve strong performance gains, particularly in the HIV sector.

Gilead Sciences Segment Results

From a segment perspective, the company continues to sustain itself by having the strongest HIV business in the world.

Most of that comes from the U.S., where the company has a strong pricing position, but Europe and other international markets still account for billions of dollars in annual revenue. The company saw some QoQ weakness, which is not surprising given the seasonal fluctuations primarily in the U.S., but year-over-year sales growth remained strong.

Biktarvy, with annual revenues exceeding $11 billion, has 49% market share with 3% year-over-year share growth and continues to dominate the market. Descovy also has strong market share growth with >40% US market share and continues to be a powerful PrEP drug protecting patients, earning nearly $2 billion annually.

The company’s hepatitis C business, once a cornerstone, has declined along with patient volume but still does nearly $2 billion a year. The company has >50% market share here. Its hepatitis B business is approaching $1 billion a year but has proven to be a tough business. They remain good sources of cash flow.

In cancer, where the company is banking on long-term strength, annual product sales have topped $3 billion. Supported by more than $40 billion in acquisitions, the company needs sales to double that to justify the investment over the long term. Sales are growing in double digits here, aided by Trodelvy, as the company’s cell therapy business remains weak.

Still, a solid R&D portfolio will help growth, and the company’s past mistakes are, in our view, priced into its stock. Previous investors may have been hurt, but today’s investors are getting the benefit of what is a strong portfolio, even if overpaid for.

Gilead Sciences Financial Results

The company reported year-over-year growth, even though it was weak quarter-over-quarter.

This was partially driven by a decline in Veklury, with the majority of the quarter-over-quarter impact driven by HIV. The company reported over $6.6 billion in quarterly revenue, supporting a strong outlook for 2024. The company expects quarterly revenue to remain broadly flat for the full year, with a more modest improvement in the second half of the year, in 2023.

The company expects total product sales of $27.3 billion with weak Veklury sales of $1.3 billion and product sales of $26 billion. The company expects strong gross margins, with IPR&D driven by the recent acquisition of CymaBay. The best candidate is Seladelpar, which is expected to exceed $1 billion in peak sales, but not for another decade.

Our take on the company’s guidance is that it maintains an extremely strong portfolio. Veklury delivered solid sales growth and shows the strength of the company’s antivirus portfolio given how quickly it was able to respond. The company maintains its guidance, which is impressive given the volatility of the industry.

We are pleased that the company is seeing strong cash flow, but would like to see it hold off on acquisitions until it sees revenue growth from its existing businesses.

The company remains committed to returning shareholders. It has $25 billion in net debt, which it has kept more or less constant, and its 2.7% dividend growth keeps its yield above 4% at current prices. The company has also managed to reduce its share count year over year and buy back 5.2 million shares at a price of just under $77 per share.

The company has about 1.2 billion shares outstanding, so it is buying back shares at a rate of just under 2% per year, a level it can afford.

Thesis Risk

The biggest risk to our thesis is not just the standard volatility risks that Gilead Sciences faces. Since becoming strong in hepatitis C, the company has made a number of acquisitions with ambitious targets in oncology, etc. While it has built some reasonable businesses with billions of dollars in spending, the returns have been poor.

In the face of continuing errors, it is necessary to find a long-term solution in cooperation with management.

Application

Gilead Sciences has an impressive portfolio of assets. The company has made some mistakes, making acquisitions worth tens of billions of dollars, but that’s now priced into the company’s stock price. The company is building an oncology portfolio that brings in billions of dollars in annual revenue and has significant potential to grow that revenue.

Going forward, we expect the company to continue to generate revenue growth. More importantly, unlike other biotech competitors, it does not have any significant potential for revenue losses from its drugs. Its HIV business remains strong and growing, and the company remains a leader in antivirals, as evidenced by its rapid handling of COVID-19.

We expect the company to generate high returns for shareholders in the future, making it a valuable long-term investment.