Gilead Sciences (NASDAQ:GILD) is one of the largest biotechnology companies, so you might be interested in how it makes money. If you're considering an investment in Gilead Sciences, you might also want to know how the company plans to make money in the future, and whether or not it's on firm financial ground.
Gilead Sciences' success stems from its long-standing dominance as the market-share leading manufacturer of HIV medicine, and from its more-recent market-leading position in hepatitis C treatment. The company has been at the forefront of developing HIV medications since the 1990s, and the vast majority of newly diagnosed HIV patients are treated with at least one Gilead Sciences drug.
Gilead Sciences' HIV drug franchise includes both individual and combination therapies. In fact, the company has enjoyed remarkable success combining HIV medicines into single-tablet drugs that reduce the burden on HIV patients, who previously needed to take many medications per day.
Two of Gilead Sciences' top-selling HIV therapies are the fast-growing combination therapies Stribild and Complera. Stribild is a four-drug combination pill commonly used in newly diagnosed patients, and Complera is a three-drug regimen that's prescribed to ease patient-dosing burden in patients whose disease is successfully controlled by a ritonavir-boosted protease inhibitor. In Q1, sales of Stribild increased 34%, to $477 million, and sales of Complera increased 19%, to $381 million.
In addition to those drugs, Gilead Sciences recently won FDA approval for a reformulation of Viread, a drug that's long been a linchpin in its various combination HIV pills. The new formulation, called TAF, is as effective as Viread, but it poses less of a safety risk to HIV patients' kidneys. TAF's advantage may lead to the use of TAF-based therapies in more patients, so Gilead Sciences is in the process of rolling out new combination therapies that include TAF.
TAF's development also improves the company's HIV patent portfolio. For example, Genvoya, a recently approved combination HIV therapy that includes TAF, has patent protection until 2029 in the United States.
Gilead Sciences also markets the two most-prescribed therapies for hepatitis C: Sovaldi and Harvoni. Sovaldi won FDA approval in late 2013, and in the process, it reshaped patient care. In trials, Sovaldi patients achieved 90%-plus cure rates over just 12 weeks. Previously, patients had to take HCV therapies for 24 weeks (or more), and cure rates were only in the 80% range.
The approval of Harvoni for use in genotype 1 patients further improved care. In trials, Harvoni delivered mid-90% cure rates over only eight weeks. Harvoni, a combination of Sovaldi and ledipasvir, won FDA approval in October 2014.
Given how dramatically these drugs impacted the indication, it's not surprising that they've both become multibillion-dollar blockbuster drugs. Despite competitors winning approval for their own next-generation HCV therapies, Gilead Sciences continues to own about 90% of the HCV drug market, and last quarter, Sovaldi and Harvoni generated combined sales of $4.3 billion.
Gilead Sciences' future growth is likely to be tied to the rollout of next-generation HIV and HCV therapies. The company entered 2016 with four combination HIV drugs, and three HCV therapies in phase 3 studies.
The FDA has already given the green light to the combination HIV therapies Odefsey and Descovy this year, and the agency is scheduled to issue a go-no-go decision on Gilead Sciences' latest hepatitis C drug on June 28. If approved, this new hepatitis C drug, a combination of Sovaldi and velpatasvir, could become the first pan-genotype hepatitis C drug on the market. Importantly, the drug could increase cure rates to nearly 100%.
Gilead Sciences' future growth will also be determined by its attempts to expand into other indications, including cancer. The company launched its first cancer drug in 2014. That drug, which is sold as Zydelig, is approved to treat chronic lymphocytic leukemia (CLL). Gilead Sciences' cancer pipeline includes momelotinib for myelofibrosis, and GS-5745 for gastric cancer.
So far, Zydelig hasn't made much of an impact on the CLL market. Recent safety concerns have put the brakes on additional Zydelig trials, and first-quarter sales were tepid, at $49 million. Meanwhile, Momelotinib is interesting, but it may not be much of a needle mover for the company. For those reasons, I think that if Gilead Sciences really wants to win in oncology, it will need to bolster its cancer pipeline via additional collaborations or acquisitions.
Gilead Sciences is already embracing that strategy to bulk up its pipeline addressing non-alcoholic steatohepatitis, or NASH. In January 2015, the company acquired NASH drug-developer Phenex Pharmaceuticals, and in April 2016, Gilead Sciences acquired NASH drug-developer Nimbus Therapeutics.
Increasingly, NASH is a major cause of liver transplant, and industry watchers project that the market for NASH therapies could total in the billions of dollars annually. Overall, Gilead Sciences' NASH program includes mid-stage studies of simtuzumab and GS-4977, and a phase 1 study of GS-9674.
Finally, Gilead Sciences has phase 2 studies underway in Crohn's disease, ulcerative colitis, and rheumatoid arthritis, and studies in ulcerative colitis and rheumatoid arthritis are moving into phase 3 this year.
One of Gilead Sciences' biggest assets is its balance sheet. Thanks to top-selling HIV and hepatitis C drugs, management is stockpiling billions of dollars in cash, while also fully funding its R&D program, and returning truckloads of dollars to investors in the form of stock buybacks and dividends.
After spending $8 billion on share repurchases, and $0.43 per share on dividends in Q1, the company still exited March with $21.3 billion in cash on its books. That firm financial footing allowed Gilead Sciences' board of directors to approve the repurchase of an additional $12 billion of the company's common stock, and an increase of Gilead Sciences' dividend per share, to $0.47 this year.
Tying it together
The biggest knock against Gilead Sciences right now is that it's a victim of its own success. Revenue has tripled since the launch of its hepatitis C drugs, and with Gilead Sciences already sitting atop the market-share leaderboard, there's little room for additional growth in these indications. For that reason, management estimates the company's sales will slow to between $30 billion and $31 billion this year, down from $32.2 billion in 2015.
Personally, I think that deceleration will be temporary. Gilead Sciences' pipeline could add billions of additional dollars in revenue per year during the next few years, and that doesn't include the potential positive impact of any acquisitions.
The company's balance sheet gives it flexibility, and management has a proven track record of sidestepping competitors. In light of this, buying shares when the company is trading at less than seven times forward earnings per share may make a tremendous amount of sense.