Pharmaceutical and biotechnology investors are exposed to significant risk. Stocks can rise to dizzying heights after a clinical trial success, only to plummet after a single failure. Once the darling of healthcare investors, Gilead Sciences' (GILD -1.15%) stock is down 7.9% year to date and has lost nearly 30% of its market value since late May. The company had encountered multiple challenges unrelated to the coronavirus pandemic. The market for its hepatitis C drugs was shrinking, oncology drug Yescarta was bringing in lower-than-expected revenue, and it had few late-stage assets in the pipeline.
Despite these troubles, the stock soared in May after its antiviral drug remdesivir (Veklury) became the first therapeutic to secure an emergency use authorization from the U.S. Food and Drug Administration (FDA) for treating hospitalized patients with severe COVID-19. However, the stock fell in early August after the company released disappointing second-quarter results. The decline was further exacerbated in late August after the FDA sent Gilead a complete response letter regarding filgotinib when used in moderately to severely active rheumatoid arthritis. Disappointing interim results from the World Health Organization's (WHO) Solidarity study of remdesivir in COVID-19 patients have further added to investor worries, though the FDA granted the drug approval last week.
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While I am not underplaying any of these concerns, I still see some solid prospects in this stock. Here are some reasons healthcare investors might consider opening a small position in Gilead Sciences -- especially now, when the company is trading at a very low valuation.
Remdesivir holds significant value
The many clinical trials conducted to evaluate remdesivir in COVID-19 patients have brought mixed results. A final report published Oct. 8 on the ACTT-1 clinical trial, which studied remdesivir for adults hospitalized with COVID-19 and suffering from lower respiratory tract infection, found that the treatment reduced the length of patients' hospital stays. While the ACTT-1 trial did not show a statistically significant survival benefit, Gilead Sciences touted that it showed a trend of reduced mortality.
Gilead Sciences has also announced positive top-line results from a phase 3 trial demonstrating the solid clinical efficacy of a five-day treatment course of remdesivir in treating patients with moderate cases of COVID-19.
Although the WHO's Solidarity study questioned the survival benefit associated with remdesivir, Gilead Sciences has pointed to shortcomings in that study, noting that it was open-label and that the results have not yet been peer-reviewed. The company also points out that the Solidarity study was conducted at multiple sites across the world, including in countries where there were no ongoing trials for other COVID-19 investigational agents. That meant significant differences in patient populations, implementation, adoption rates, and controls. While these shortfalls remain unsubstantiated, they do raise valid concerns about the Solidarity study's design.
The FDA has also placed more faith in positive trials for remdesivir and has approved this drug as the first treatment for hospitalized COVID-19 patients.
A leader in the HIV business
Gilead Sciences is still very much a force to reckon with in the HIV space. Its blockbuster drug Biktarvy has already emerged as the top-selling HIV drug not only in the U.S. but also in many major international markets, both for newly diagnosed patients as well as those switching from other therapies. HIV preventative drug Descovy is also rapidly gaining momentum. Currently, 43% of the total HIV prophylaxis prescriptions in the U.S. are for Descovy.
In the first half of fiscal 2020, Gilead Sciences' HIV franchise reported a 6% year-over-year rise in product sales to $8.1 billion. Biktarvy and Descovy together accounted for about 51% of the company's total HIV product sales, and that segment makes up about 77% of the company's total product sales.
However, the company's HIV franchise is also facing a few challenges. Biktarvy is cannibalizing the market share of Gilead's older HIV drugs; also, since late last year, the company has been involved in a patent fight with the U.S. government over rights to its HIV prevention drugs Truvada and Descovy. The company has been unsuccessful in invalidating the U.S. government's patents for Truvada at the U.S. Patent and Trade Office.
The Immunomedics acquisition adds a promising asset
In September, Gilead Sciences announced the acquisition of Immunomedics (IMMU) for $21 billion in cash. As part of the deal, Gilead acquired Trodelvy, the first FDA-approved treatment for a highly underserved segment of breast cancer patients. The company is planning to submit a regulatory application for Trodelvy in Europe in the first half of 2021, and if this drug is effectively commercialized, it could prove to be a blockbuster opportunity for the company.
A hefty dividend payer with a low valution
Gilead Sciences' current dividend yield is 4.5%, much higher than the S&P 500's current average yield of 1.7%. The dividend payout ratio of 44.3% implies significant financial flexibility to fulfill its dividend commitments.
Gilead Sciences is trading at a forward price-to-earnings (P/E) multiple of only 8.7. Peers including Amgen, Regeneron Pharmaceuticals, and Biogen are trading at forward P/E multiples of 13.7, 16.6, and 9, respectively.
There is no doubt that Gilead Sciences is facing several headwinds. A string of past acquisitions -- including Forty Seven, Kite Pharma, and now Immunomedics -- has led to high debt and limited cash reserves. This could prove precarious for Gilead, especially if the company fails to successfully commercialize the acquired assets. Investors are also concerned about the company's $24.1 billion debt. The Immunomedics deal has added $6 billion of debt to the company's balance sheet, while its cash and marketable securities balance of $21.2 billion has taken a $15 billion hit.
However, the company still has a stronghold in the HIV space and promising COVID-19 treatment, and it may soon add a potential blockbuster breast cancer therapy to its portfolio. And while the FDA did not, the European Commission has approved Jyseleca (filgotinib) for patients with moderate to severe active rheumatoid arthritis, offering hope that the FDA could do the same in coming years.
Taking on a big position in this stock right now may be unwise because of the uncertainty surrounding it. But interested healthcare investors should find enough reason to start a small holding in Gilead Sciences -- especially at its current discounted share prices.
