Gilead Sciences: Science Doesn’t Add Up (NASDAQ: GILD)
Gilead Sciences (GILD) saw a painful reversal in its stock price to its lows, as stocks fell back to their lows around $63 per share here, after posting losses of around 10% year-to-date.
I’ve been constructive on the name for some time now, and while some total returns are being seen, given the big dividend yield, this of course marks a dramatic underperformance relative to the broader market.
My last take on the company was in February of last year when I called Gilead Sciences still a good bet with shares trading near $70 at the time.
Since the transformative treatment for HCV, Gilead has tried for years to diversify the pipeline with targeted acquisitions as it has spent billions to buy back its own stock in an effort to create value for investors. For years, the overhang of declining HCV sales has weighed on the company and its stock, as the company has resorted to merger and acquisition efforts to achieve this turnaround.
In 2021, Gilead acquired Immunomedics in a $21 billion deal to get its hands on Trodelvy. This FDA-approved drug (approval came in April 2020) for metastatic triple-negative breast cancer should make a contribution, but it was still difficult to estimate how much that would be. Sales of the drug were $20 million in the first two months after approval, as this revenue contribution equates to less than 0.1% of Gilead’s total sales.
Mergers and acquisitions have a mixed record at Gilead. The $11 billion purchase of Pharmasset created the HCV franchise and was obviously a big winner, but other mega deals didn’t go so well. This includes a $12 billion purchase of Kite Pharma, through which the company obtained Yescarta, which seems expensive given current sales performance. Forty Seven and Galapagos haven’t (at least so far) been winners, in fact quite the opposite, as Gilead has also announced other multi-billion deals.
With some $40 billion spent by the company, effectively representing the majority of share value already in 2021, it was clear that Gilead had some to prove.
In early 2021, the company announced sales for 2020 that showed sales growth of 10% to $24.4 billion in annual sales, with growth driven by Veklury, its Covid-19 drug. Adjusted for that, organic sales were otherwise down 2% from a year earlier. The company guided 2021 sales to a midpoint of $24.4 billion, showing flat sales. This includes approximately $2.5 billion in Covid-19 sales (Veklury), down slightly from the $2.8 billion reported in 2020, suggesting modest growth for the mainline franchise.
Adjusted earnings were $7.09 per share in 2020 and were guided around $7.10 per share in 2021, but GAAP earnings were virtually non-existent. The deals pushed net debt up to $30 billion, about 2.5 times operating profit. Under the total roof, there have been a few changes. The HIV franchise is by far the largest with $16.9 billion in annual sales, but momentum has slowed. Trodelvy sales were $49m in the fourth quarter as the $200m fill rate isn’t enough to justify a $21bn deal, but momentum is building .
At the time, I concluded that my average price (including dividends) of $61 let me maintain a neutral position at $69 in February 2021. The valuation, at 10 times earnings, is not demanding , but there is a gap with GAAP earnings and debt has also increased a little, although some growth could lead to rapid deleveraging and prospects for expanding valuation multiples.
Fast-forwarding a year, shares have fallen from $69 to $63 as 2021 results have just been released. Total revenue reached $27.0 billion, well ahead of initial forecast, but this is driven by Veklury sales, which reached $5.5 billion, $3 billion ahead of initial forecast , while total revenue only exceeded initial forecasts by $2.6 billion.
HIV sales had another tough year, down 4% to $16.3 billion, still the dominant franchise. The HCV implosion continues, albeit at a much more modest pace with sales down 9% to $1.9 billion. HBV/HDV sales increased 13% to just under $1 billion, with cell therapy sales up 43% to $871 million, driven by a nearly $700 million contribution to income from Yescarta.
Another growth engine was Trodelvy, which generated $380 million in revenue, although the $118 million fourth quarter run rate had already reached nearly half a billion a year. Amid all of these moving targets, adjusted earnings per share are up slightly to $7.28 per share, a smaller pace relative to the outlook, as we saw on the top earnings. Looking at the third quarter results, net debt has already been reduced to $20 billion, which is quite comforting.
The problem is not so much with the 2021 results, as they have been strong, but the problem is with the outlook for 2022. For the current year, sales are estimated at a midpoint of around 24.0 billion, but that includes about $2.0. billion in Veklury sales, so adjusted for that, product sales were down nearly 10% to $22.0 billion. This translates into an estimated per share adjustment of $6.45 per share.
The truth is that I too, like many investors, have been buying the dip since the HCV boom because stocks looked relatively fair during that time. While HCV sales have imploded because the company actually provided a cure, the company has built a fast-growing, profitable HIV franchise, which is encouraging, but other parts of the business haven’t either. contributed more.
At $63, the company now bears a stock valuation of just $79 billion, as up to $40 billion has been spent on some of the aforementioned transactions, as well as multiple other smaller acquisitions, which have not lived up to expectations.
While Yescarta and Trodelvy are starting to contribute a little, the combined revenue contribution of billions in 2021 equals only 4-5% of total sales. While contribution to growth will undoubtedly increase on this front in 2022, the full-year outlook reveals that the HIV franchise will likely be under pressure, causing the HCV nightmare to begin again.
In the meantime, debt is still fairly manageable here, after some deleveraging over the past year, but operational excellence and accountability are just below average, primarily in the allocation of capital, including trading. So I find myself at a difficult crossroads. Having a full position again, I’m still confident that a full position here seems warranted amidst some still promising areas of the portfolio and pipeline and of course cheap valuation, but it’s very hard to be optimistic after so many disappointments.