By Aidan Asbill, Biotech Analyst
The California-based drug company dominated the healthcare sector with its highly effective and lucrative array of treatments for life-altering diseases. However, Gilead would become a victim of it’s own success, with the company essentially curing Hepatitis C (HCV). Gilead had astonishing sales of $19 billion in 2015 from their HCV treatments alone, but just 3 years later this would fall to $3.7 billion in 2018. These sales have continued to decrease as the company made only $2.1 billion in HCV sales in 2020. Gilead’s HIV franchise is also at risk: two of its drugs, Truvada and Atripla, which brought in the company $3.4 billion in annual revenue, are losing their patent protection. All of this has resulted in Gilead’s stock dropping 41% from its all-time highs in 2015. With revenue growth continuing to dwindle, Gilead would need a completely different approach. In 2017, the company would do just that with its substantial $12 billion acquisition of Kite Pharma, a cancer therapy treatment company. In 2019, Gilead continued to make big changes as the company announced its new CEO, Daniel O’Day. O’Day would prove invaluable as he had previously been the CEO of Roche, the second-largest biopharma company in the world. Under O’Day, the company continued to aggressively expand its cancer pipeline spending a remarkable $27 billion in acquisitions last year alone. The company’s aggressive acquisition strategy has intrigued both wall street and investors alike. However, let’s first look at Gilead’s historical rise to a biopharmaceutical giant before the company’s fall from grace.
Gilead’s path to a Biopharmaceutical Giant
Gilead Sciences was originally founded under the name Oligogen in 1987. The company’s primary therapeutic focus was on antiviral medicines, a field that greatly interested founder Michael Riordan after he caught dengue fever. In 1991, the company began to research the compounds that would make their blockbuster drug tenofovir. The next year, the company would IPO, raising $86.25 million in the process which would bring crucial funds for the years to come. In 1996, the company launched Vistide, which was a treatment of cytomegalovirus in patients with AIDS. A few years later, Gilead would make their first huge acquisition of Nexstar Pharmaceuticals, which had annual sales of $130 million, nearly 3 times that of Gilead’s. Later that year, Roche got FDA approval for Tamiflu, a treatment for patients suffering from influenza. The drug was originally created by Gilead and would be licensed by Roche to bring in massive revenues for both companies in the years to come. In 2001, Gilead’s blockbuster drug Tenofovir achieved FDA approval for the treatment of HIV. The next year, the company acquired Triangle Pharmaceuticals for around $464 million which led to the company acquiring the drug Emtricitabine a treatment for HIV that was very promising. Later that same year, Gilead got FDA approval for Hespera for the treatment of hepatitis B and Emtrivia for the treatment of HIV. These two drugs would become vital for Gilead, as they served as a great starting point for all their big future drugs to come. Around 2004, with the Avian Flu pandemic scare, the company’s revenue from Tamiflu skyrocketed nearly four times to $44 million. By 2005, sales of Tamiflu continued to skyrocket resulting in revenue of $161 million from the drug and the stock price doubling. In 2006, things continued to progress quickly for the company with their drug Atripla, a once-a-day single tablet regimen for HIV gaining FDA approval. Atripla was unique because it worked by combining Bristol-Myers Squibb drug Sustiva, and Gilead’s own product Truvada, to make one super drug. With many products reaching the market, the company would see tremendous growth in these years. In just 5 years, the company would nearly quadruple its annual revenue from $2 billion in 2005 to $7.9 Billion in 2010. However, this was just the beginning as Gilead was about to make a breakthrough that solidify their scientific reputation forever.
A Victim of Success
In 2011, Gilead made a massive acquisition spending $11 billion to acquire Pharmasset to get the smaller biotech’s hepatitis C program. Forbes magazine would later rank this one of the best pharma acquisitions ever. In 2013, the FDA would approve Gilead’s all-star drug Sovaldi for the treatment of hepatitis C. However, this was just the beginning as the FDA would soon approve Harvoni, the first hepatitis C treatment that provides a long-term remedy in a single tablet. The drug combined Sovaldi with an NS5A inhibitor and essentially cured Hepatitis C, with 94% to 99% of cases being resolved after treatment. This had absolutely massive revenue implications; as at the time Hepatitis C affected 3.2 million Americans and killed more people each year than HIV/AIDS in the US. After just a couple of years of Gilead’s treatments on the market, this number decreased to 2.4 million people with hepatitis C in the US in 2016. During these years, Gilead would post astronomical revenue numbers of $11 billion in 2013, $24.8 billion in 2014, and $32 billion in 2015. With Gilead touted for curing hepatitis C, the company had finally become a biopharmaceutical giant. However, Gilead would become a victim of becoming too successful, with revenue quickly declining as patients were cured of hepatitis C. By 2016, Investors begin to question if the company’s hepatitis C business had peaked. With sales dropping quickly, Gilead would need to make a big move in order to reinforce investor sentiment which was quickly fading away. In 2017, the company made a huge purchase: $11.9 billion for Kite Pharma. This deal would add Kite Pharma’s promising CAR-T therapy pipelines to bolster Gilead’s oncology division. However, with the company’s blockbuster drugs losing market share and patent protection soon expiring, the stock would suffer greatly during this period. Since 2016, despite the company-wide array of products, revenue growth questions pushed the stock down 12% from its 2016 stock price. In order to restore market sentiment, the company would need to completely reinvent itself.
Gilead’s Cancer Comeback
Since its creation, Gilead has focused on antiviral drugs for HIV and hepatitis, but the company hasn’t found near as much success in cancer research. This is quickly changing with the company aggressively positioning itself as an oncology powerhouse. While sales of the company’s top drugs continue to stagnate, this has created immense pressure for Gilead’s cancer division to come through. Under CEO Daniel O’Day, the company has spent billions to acquire every promising cancer company they can find. In 2020, Gilead acquired equity in 7 different cancer companies, including complete acquisitions of Forty Seven for $4.9 billion and Immunomedics for $21 billion. These huge acquisitions have slowly made Gilead’s oncology pipeline one of the most alluring in the biopharmaceutical world. With 19 candidates in its oncology pipeline, including 4 phase 3 trials and 4 more phase 2 trials, the company has potentially multiple billion-dollar treatments in its pipeline. Since 2011, investors have been skeptical of Gilead’s big $11 billion bet on Kite Pharma, which has yet to provide a revenue growth story from its CAR-T treatments. In March this year, the FDA approved Yescarta for the third indication, which is the most common form of lymphoma. However, just a month earlier direct competitor Bristol Meyers Squibb drug Breyanzi got FDA approval for their own CAR-T therapy for large B-cell lymphoma. Despite Breyanzi’s approval, Yescarta is still the market leader in the CAR-T drug space with sales of $160 million in the first quarter. With that being said, Bristol-Myers Squibb and Gilead are both in a race to get FDA approval for second-line large B-cell lymphoma which the winner becoming the clear market leader in the space. Breyanzi was able to report top-line results a bit earlier than Yescarta, but both companies have reported very compelling data. Yescarta showed a 60% improvement in patients, which blew away the previous 33% improvement predictions. While it’s unclear who will win the race, if approved for second-line large B-cell lymphoma, Yescarta could become the highest revenue-generating gene therapy product on the market. Yescarta treatments are reported to cost $373,000 per treatment regimen with 8,000 eligible patients for their current third-line indication which is nearly $3 billion in potential revenue. However, a potential 14,000 new patients would be eligible if Yescarta can secure FDA approval for the second line which would be over $5 billion in additional revenue. Gilead’s acquisition of Immunomedics may also be a revenue growth machine. Trodelvy, a treatment for breast cancer, has a giant addressable market. In April, the drug was able to snag FDA approval for triple-negative breast cancer. If the treatment is able to get FDA approval for more indications it can address a breast cancer market of $88 billion annually. Some analysts have forecast sales as high as $4.7 billion in peak annually. With countless other candidates in Gilead’s vast oncology pipeline, the company is positioned for a very bright future.
Its unlikely Gilead will reach its 2015 revenues of $32.6 Billion anytime soon, but the company has a promising future with its oncology pipeline that could grow the top line. The stock also has an extremely strong dividend of 4.12% making it in the top 25% of all dividends payers in the US market. Over the last few years, Gilead has lost much of its investor sentiment with declining revenues and the inability to expand its products. This has led to an interesting valuation of the company which had reached a low near $60 with a valuation of forward 10x PE during 2020. This was down from the forward 15x PE ratio at its peak in 2015. The decline was mostly due to a lack of sales in the company’s flagship HIV and hepatitis treatments. However, since then investors have begun to see the strength in the company’s pipeline increasing the stock price to the current $68 and valuation 12.5x PE. Still down 16% from 2020 highs when the company was getting a lot of traction for its potential covid-19 treatments. The company has been hard at work seeking new revenue sources, investing over $5 billion of its revenue into research and development each year. Gilead also hasn’t abandoned its roots in its HIV department, with Bitarvy becoming the number 1 prescribed HIV drug in the country, with 50% of HIV patients being treated with the drug. The drug was able to increase its sales to $7.3 billion in 2020, up from $4.7 billion in 2019 and just $1.2 billion in 2018. On top of this, Gilead should maintain market dominance for a long time with Biktarvy being patent protected until at least 2023. Like many other pharmaceutical companies, Gilead enjoys high-profit margins and generates a lot of cash which should allow the company continue to make acquisitions. The company still has many hurdles to overcome with Truvada and Atripla losing their patent rights. Gilead will also have to continue to get ahead of the competition. If the Yescarta CAR-T treatment is unable to get more FDA approvals, the company’s cell therapy pipeline may take years to recover. The company is also placing a lot of faith in Trodelvy breast cancer treatment, with their gigantic $21 billion dollar acquisition of Immunomedics. The drug, however, still will need many more indications approved by the FDA in order to reach revenue numbers high enough to pay off such a huge investment.
Under Daniel O’Day’s expertise, Gilead has successfully transitioned much of its resources into becoming a cancer company. With a gigantic pipeline of 19 candidates in their oncology department, the company is on the cusp of huge future revenue numbers and earnings. With decreasing sales in recent years, the company is putting all its hopes on its cancer department to fix its revenue problems. However, it may take many years for this bet to pay off and come to fruition. In today’s, high growth and short-term market, investors may not flock to Gilead. Still, for long-term investors, the company’s amazing 4.05% dividend and vast oncology department look very appealing. Ultimately it will be up to investors if they trust in Gilead’s team to deliver on its transition to a cancer company or if the company will become a forgotten relic of the past.
Disclosure: The Sick Economist owns shares in $GILD
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