Analysts Underestimate Gilead COVID-19 Treatment (NASDAQ:GILD)

The first time I wrote about the Gilead (NASDAQ:GILD) opportunity was back on February 5. Surprisingly, it only beat the Nasdaq Biotech ETF (IBB) by a hair. It did beat the S&P 500 (SPY) by a large margin. Initially, it did great. But, from May, it started giving back gains as the narrative became COVID-19 is over, let’s reopen. With that narrative increasingly questioned, perhaps the market will start to appreciate Gilead. Or maybe not.

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In this article, I’ll first examine what analysts seem to expect for Gilead before diving into what the earnings profile could look like for remdesivir.

Year-to-date for the current year, analysts have been revising revenue estimates for this year downwards. Most of Gilead’s revenue is through AIDS and HCV treatments. These are generally not optional treatments.

Analysts also see earnings-per-share falling quite a bit. That only makes sense if you are ascribing no or little value to remdesivir for 2020. The company is likely spending quite a bit to set up a remdesivir manufacturing program and also to deal with COVID-19 effects in the rest of the business.

After talking about these estimates, I’ll go into why I think giving remdesivir zero credit is wrong.

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Data by YCharts

Analysts see a slight revenue rebound for 2021:

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Data by YCharts

However, the average estimate isn’t very positive on EPS development:

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Data by YCharts

I’ve said this multiple times, remdesivir is not a miracle drug. It doesn’t cure COVID-19. But it has been shown to get people faster out of the hospital. I’m inclined to believe it may have a beneficial effect on mortality rates as well. Especially if it is given earlier on. That’s because it works by slowing/stopping the replication of the virus.

The mortality rate of COVID-19 patients is decreasing. In COVID-19 Is Back, I’ve speculated what could drive that. One factor could be remdesivir:

  • People social distance in a way that decreases the percentage of infections with a high initial viral load
  • With sufficient protection available to health care workers, this also decreases the percentage of infections based on a high viral load
  • Young people are taking more risks in the opening-up phase, young people have much better survival rates and it takes longer for them to die (when they do)
  • Treatments have improved quite a bit and are now more effective
  • Remdesivir is becoming more widely available
  • Summertime likely decreases the prevalence of vitamin D deficiency
  • Viruses tend to evolve towards more infectious but less lethal versions over time

Total-addressable-market is a metric that’s thrown around way too much in the past year. But, I think it’s a useful way to think about the value of remdesivir. If there are no cases, no treatments are required. But the estimates for 2020 and 2021 in terms of revenue and EPS have barely budged while I’d say it is increasingly clear the market is growing (global new cases):

In the U.S., the number of new cases in Arizona is alarming:

As are developments in Texas:

and Mississippi:

And a surge in cases isn’t isolated to these states. A more complete picture can be found here. The surges are widely covered, so I won’t go too deep. As unfortunate as it is, this clearly increases demand for remdesivir.

Watch their actions, Not their words

– Isaac Ekhaigba

Both in Europe and the U.S., I’m seeing governments push to find the limits of necessary measures to keep the R0 below 1 while getting their economies going. Restrictive measures are loosened through trial-and-error until things break.

People panic when ICUs are nearing capacity. At that point, many people are willing to give up quite some freedom. As soon as the virus is contained and things quiet down, people are eager to resume their lives. Suddenly, the measures intended to keep the R0 below 1 are considered overzealous. All the talk about waves has people thinking about the virus in terms of a hurricane or flood. Something that strikes and passes. It’s better to think about it as nuclear fallout. It is everywhere and you need to protect yourself or clean it up.

When we let our guards down, the virus starts spreading again. First, nothing happens, then suddenly hospitals are on the cusp on being overwhelmed once more. That’s how an exponential process works.

Both authorities and people will respond to the physical manifestations of the threat. But if it isn’t in their face, there is a lot of complacency. At the personal and bureaucratic level, I’m not judging anybody or but it’s an observation. I think this behavior is likely to continue. The result is a constant dance between local societies and COVID-19. It is becoming increasingly likely the economy will continue to be disrupted well into 2021.

Remdesivir is hard to manufacture. It takes a long time. Gilead published the graphic below. I expect it will be quite accurate predicting production because sourcing raw materials are one of the hard problems. If you have that, you should have reasonable visibility many months ahead.

First, Gilead gave away 1.5 million doses. This is about 300k treatments. Nearly 200k treatments are given away in the U.S. The U.S. alone has 2.4 million confirmed cases, over 100k deaths and 800k recovered cases. Remdesivir has been distributed to other countries as well. We are probably close to having burned through the giveaway vials or will burn through them in the next couple of weeks.

I think Gilead is taking both an intelligent and generous approach in marketing what’s going to be a drug in the biggest spotlight there’s ever been. They have given away their entire ready-made supply.

Gilead is licensing remdesivir all over the world through partnerships. Per Bizjournal:

Gilead has signed non-exclusive voluntary licensing agreements with a number of generic drug makers – Mylan N.V. (NASDAQ: MYL), Cipla Ltd., Eva Pharma, Ferozsons Laboratories Ltd., Hetero Labs Ltd., Jubilant Life Sciences Ltd., Syngene International Ltd. and Zydus Cadila healthcare Ltd. – in India, Pakistan and Egypt to extend remdesivir’s availability.

The deals are free of royalty payments until the World Health Organization declares an end to the pandemic or until another drug or vaccine is approved against Covid.

The 127 countries involved in the deals – from Afghanistan to Zimbabwe, Gilead has said – range from low-income countries to high-income regions with “significant obstacles” to health care.

There won’t be any royalties until another drug is improved. This is an amazing generous concession. That shows a very generous Gilead as it gives up a very strong position to exact untasteful prices. There are millions of pharma haters and they won’t be appeased by anything but I think this gets Gilead a lot of goodwill with regulators.

There’s been very good news that Dexamethasone may be effective. An Oxford University-led trial, RECOVERY, showed the cheap exiting drug could cut the risk of death by 28-40%.

I’m not a virologist or MD but my read is that the drug is entirely complementary to remdesivir. It is fantastic that it’s there from a humanistic perspective but also from a Gilead shareholder perspective.

As I’ve argued on February 17(and earlier to subscribers):

The value to Gilead is not most sensitive to the price charged. It is most sensitive to one thing; how viral does this go?

Pandemics have historically killed up to 500 million people and infected a multiple of that. Whether Gilead is getting $100 or $500 per treatment is not what drives the economics. The market doesn’t price much of anything in.

Whatever the revenue, it is likely to come at 80%-90% gross margin (~100% if Gilead gets royalties from other producers). Gilead’s trailing twelve-month EBITDA is about $7 billion.

At $260 per treatment, it takes ~30 million treatments to double Gilead’s EBITDA for the year.

But really analysts have very low expectations. Just look at the way guidance has been adjusted as COVID-19 has been spreading. One independent report put sales for 2020 at $1.7 billion and for 2021 at $2.5 billion.

If you price it at $1k (The analyst uses the lowest price estimate I’ve seen at 25% of that used by a price watchdog) and gives the company credit for selling two months of capacity near the end of the year, you’re already 40% over that estimate. While not giving any credit for royalties. Same story for 2021. Gives credit for two months of capacity out of 12 and ignores royalties.

If Gilead only makes a couple of billion over the next two years and then it’s over because there’s a vaccine then the market won’t put a multiple on that cash flow and it doesn’t really move the valuation of a $100 billion biotech.

But the vaccine isn’t here yet. Even effective vaccines don’t always work perfectly. This is especially true for older people (who are susceptible to COVID-19), a vaccine could readily cost $250-$500 per dose too and it could turn out that the vaccine works for a limited time only.

One thing I’m not all that sure about is whether there will be interest in the vaccine by the time it’s here. This may sound real out there but hear me out.

There’s already a significant and loud number of anti-vaxxers. By the time the vaccine is here a percentage of the population may have already had COVID-19. Treatments may have improved (including treatment by remdesivir) to the point where the disease just isn’t very dangerous for large swaths of the population. You only need to give remdesivir to a percentage of the infected that really needs it. You have to give a vaccine to a large number of people AND if you fall short of getting to the hurdle for group immunity, it is very expensive while still not protecting your population well. Especially if remdesivir is priced at the low range it may be more cost-effective for many countries to go with treatment.

Bottom line

I think this is still a great position to have. I’m not super confident it is going to generate a positive 1-year return from here but there’s significant potential for a very high 1-year return. Especially, under very unfortunate circumstances. That makes Gilead an interesting addition to a portfolio because of its hedging characteristics.

An extended version of this article is available to subscribers of The Special Situation Report. In the exclusive version, I’ll get into more detail around pricing of the drug in the U.S. and Europe as well as royalty related revenue.

Try a 2-week free trial if you are interested in diversifying your portfolio beyond the ordinary. If you are interested in special situations like spin-offs, buybacks and rights offerings. But also if you are interested in unique one-time events like pandemic related drug sales that are often misunderstood by the market.

Disclosure: I am/we are long GILD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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