Last May, Gilead Sciences (GILD -0.72%) became one of the hottest stocks around after advancing the world's first coronavirus treatment, Veklury (then called remdesivir) to market. Shares of the large-cap blue-chip biotech soared over 30% after the news, but enthusiasm for Veklury has largely cooled off since. Not only has Gilead stock lost all of its gains, but it is now down slightly from a year ago.
Those looking for hot coronavirus stocks will likely be disappointed in Gilead. But there are several other factors that make it a good investment nonetheless.
It's all about Veklury
Back in the third quarter of 2020, Gilead's revenue and earnings per share (EPS) were up 18% and 29%, respectively, year over year. Revenue reached $6.5 billion and EPS hit $2.11. Veklury was the single biggest contributor to this growth, adding more than $873 million in quarterly sales. Without it, Gilead's revenue would have gone up by just 2%.
Unfortunately, Veklury will likely be a one-time boost for Gilead. While the drug is superior to placebo in shortening time to recovery for those with severe COVID-19, it is not as effective in other areas. The World Health Organization currently recommends against the use of Veklury due to lack of evidence suggesting that Veklury improves survival rates. Meanwhile, ample competing coronavirus treatments that have been shown to improve survival are in clinical trials now, such as the ones manufactured by Regeneron and Roche/Sanofi.
The most serious commercial threat, however, comes from coronavirus vaccines. Keep in mind that Veklury is only partially effective against COVID-19 and costs $520 a vial. Meanwhile, coronavirus vaccines cost as little as $19.50 apiece and can show more than 90% efficacy against the disease. As more and more people gain immunity to the coronavirus, Gilead's drug simply will not be able to compete.
A spree of acquisitions
Without Veklury, Gilead will likely struggle to improve its bottom line. For years, the company relied on its hepatitis C therapeutics to generate much of its sales. As those drugs cured more and more patients, however, Gilead's cash flow began to dissipate.
To compensate, the company began flexing its muscles during the latter half of 2020 via acquisitions. The first deal came with its $21 billion buyout of Immunomedics, the biotech behind Trodelvy, an antibody used for the treatment of a specific form of breast cancer. The drug has been shown to reduce patients' risk of death by 52%, and analysts expect Trodelvy to generate between $1.5 billion and $5 billion in peak sales.
After that, Gilead announced it would be paying 1.15 billion euros to acquire German biotech MYR GmbH and its drug Hepcludex. The European Medical Agency (EMA) granted conditional approval to Hepcludex to treat chronic hepatitis delta virus (HDV) in 2020, and MYR GmbH expects the U.S. Food and Drug Administration to follow suit in the second half of this year. HDV is a deadly illness with a mortality rate of 50% in five years, and in clinical studies, about half of patients who received Hepcludex demonstrated improvement. The drug will likely become a first-in-class treatment for 12 million individuals with the condition worldwide.
Takeaway for investors
Overall, Gilead's growth trajectory will likely plunge this year as the mass rollout of coronavirus vaccines begins to obviate the need for treatment. Even though the company took steps to add growth via acquisitions in 2020, it also used up a vast majority of its $24 billion in cash in doing so, as well as adding more than $6 billion to its $31.9 billion debt pile.
Investors should note that it will take significant time for Gilead's new subsidiaries to reach their potential. An example is Tecartus, a therapeutic developed by cell therapy firm Kite Pharma, which Gilead acquired back in 2017. This January, Tecartus received conditional approval from the EMA after demonstrating that it could eliminate tumors in patients with mantle cell lymphoma 67% of the time. That drug will likely become a blockbuster due to outstanding efficacy.
But while there may be a waiting period before results are seen, Gilead remains a fantastic long-term buy due to its valuation. Right now, the stock has a 4.3% dividend yield and trades for just 3.4 times sales and 9.8 times free cash flow. That puts it at a significant discount to its peers -- biotech firms typically trade for about 8 times revenue and 31 times earnings.
Those looking for good coronavirus stocks should stay away from Gilead, as its growth opportunities are elsewhere. That said, it is a solid choice for investors searching for a large-cap biotech at the right price.