GILEAD SCIENCES INC: CLEAR CASH FLOW, CLOUDY FUTURE?

By Subin Im, PharmD

Gilead ($GILD) got its fifteen minutes of fame in the beginning of the pandemic through its antiviral medication, remdesivir (Veklury), which is used to treat hospitalized COVID patients and high-risk patients outside the hospital. From its peak at $84.99 on April 17, 2020 to its current price of $61.15 (as of 4/7/2022), it has been quite a rocky downhill. But will Gilead be able to recover? Let’s look at some of the recent changes that impact its trajectory.

In the beginning of March 2019, Gilead had a change in leadership with the new CEO, Daniel O’Day. One of the biggest potential problems that the new CEO identified were the expiring patents on Gilead’s greatest assets. For example, Truvada, which is used as pre-exposure prophylaxis to prevent contracting HIV, has a patent that expires in 2020. Truvada generates $3 billion out of the $22.4 billion of Gilead’s total revenue in 2019, so it was only a matter of time. When revenues are decreasing with the lack of innovative in-house pipeline medications, people tend to panic and are prone to take action. The type of action that Daniel O’Day chose to take is acquisitions. 

Since 1987, six of the 21 total acquisitions by Gilead have been in the last five years. Through its acquisitions, Gilead made it clear that it does not want to be a one trick pony in treating viral diseases. As the leader of antivirals, 70% of its 2020 sales came from its HIV franchise, with one of its treatments for HIV (Biktarvy) bringing in 29% of its total 2020 sales. Gilead has delivered life changing medications for patients. For instance, its medications (Sovaldi and Harvoni) can cure hepatitis C, which cause inflammation and damage to the liver. Although this development was revolutionary from a healthcare and patient standpoint, it is not as bright when looking from a business standpoint. The limitation is that because they cure people rather than chronically treat, their sales are bound to die out. It is quite unfortunate that Gilead was not even able to reach its intended target patient population (those with Hepatitis C) because many insurance companies are only approving coverage for those who are extremely affected by this virus with severe decompensated livers.  In addition, the sales of its COVID-19 treatment, Veklury, is facing a roadblock as there are milder strains of the virus that do not lead to as high of hospitalization and death rates. Therefore, its diversification of therapeutic areas, specifically oncology, needs to be a game changer for Gilead. 

In 2017, Gilead acquired Kite Pharma for $11.9 billion in cash, which develops treatment for blood cancer through CAR-T therapy. Through this innovative technology, patient’s cells are taken to the lab where they are engineered to target and kill cancer cells. Then, the “stronger” cells are infused back into the patient. To further its oncology quest, Gilead acquired Forty Seven for $4.9 billion in 2020, gaining control of its lead candidate antibody magrolimab. However, in the beginning of 2022, Gilead announced that it is partially holding its clinical studies of magrolimab due to unexpected serious adverse effects. 

To really mark its presence once again, Gilead pursued its largest acquisition of Immunomedics for $21 billion in 2020. This acquisition came with a heavy price tag because of its most sought-out asset: Trodelvy. This medication can treat triple negative breast cancer, which is the form of breast cancer that is most challenging to treat. Trodelvy identifies a specific protein called TROP2 and kills cells that express TROP2. Due to its dramatic results, it has been approved for triple negative breast cancer and locally advanced or metastatic (stage 4) urothelial cancer. But there is more. TROP2 is not only expressed in breast cancer and urothelial cancer but in also other types of cancer, such as lung cancer. Therefore, its list of indications is most likely to expand within the next decade, potentially making it a blockbuster medication. However, some of Trodelvy’s latest clinical data is underwhelming when one considers the high price that Gilead paid for the intellectual property. 

Gilead is not straying too far from its core focus of antivirals. In early 2021, Gilead acquired a German biotech company called MYR, which develops treatments for hepatitis B and D. This deal was finalized at $1.4 billion cash.  It’s too early to  know how that purchase will work out. 

Clearly, these acquisitions did not come with a light price tag. Is Gilead spreading itself too thin with all these acquisitions and potentially struggling to operate as one cohesive company? Gilead’s long-term debt increased by 46.18% in just a year, from $23.1 billion in 2019 to $33.88 billion in 2020. Of course, it will take time to see the fruits of these acquisitions. But it is also important to remember that Gilead may be digging itself a bigger hole of debt that might be hard to get out of. On the “brighter” side, Gilead’s current dividend yield of 4.8%  has grown by 36.5% over the past five years. Even with all of the challenges facing the company, that juicy yield still represents just 37% of the company’s total cash flow.  But this dividend yield may not be enough to justify the current declining value of Gilead. The company’s solid current income is beyond question, but whether or not all of these acquisitions will pay off in the form of share price growth is anybody’s guess.