2023-11-15 15:37:21 ET
Summary
- Gilead Sciences has a robust pipeline in oncology and HIV, indicating sustained growth potential.
- The company offers dividends, buybacks, and an attractive valuation, making it an appealing investment option.
- Gilead's path to $100 per share is plausible with transformative catalysts and upcoming clinical data.
Introduction
This year, I've increased my focus on healthcare/biotech. Not only do I believe that it is a fascinating sector with tremendous secular growth tailwinds, but I also appreciate the value some companies bring to the table.
One of these companies is Gilead Sciences ( GILD ) , which has been a terrific source of wealth for millions of investors. Well, at least until 2015.
As The Value Investor wrote a few days ago:
A decade ago Gilead was a $20 stock. Its fortunes changed after an $11 billion deal for Pharmasset, through which Gilead obtained a cure for HCV. Its success sent shares to levels around the $100 mark in 2014 and 2015.
This cure has been somewhat of a mixed bag. The success propelled shares higher but created a headwind to the growth of the business as well, as Gilead's drugs provided a cure thereby rapidly depleting the patient population. Furthermore, not all capital allocation actions have worked out fine (i.e., share buybacks at elevated levels and some expensive M&A activity).
This year, GILD shares are down 13%, excluding dividends, making it yet another year with disappointing returns.
However, I believe there is light at the end of the tunnel. The company has a packed pipeline, stronger growth in its existing business, new market opportunities with high growth expectations, an attractive valuation, and a juicy dividend.
I'm starting to like the risk/reward and see a realistic path to $100 per share, implying roughly 33% growth.
So, let's dive into the details!
Gilead's Path To Sustained Growth
Gilead is the world's largest virology company, with a growing oncology business.
As the company discussed during the very recent Jefferies London Healthcare Conference, despite challenges, it has experienced significant growth in its base business, including the core antiviral business, stable hepatitis franchise, and thriving oncology business.
Gilead's base business has shown strong growth, with an 8% year-over-year increase in the previous year and a projected 7% to 8% growth in the current year.
Growth is attributed to the core antiviral business, particularly in HIV treatment, and the positive contributions from the oncology business, driven by Trodelvy and the cell therapy business at Kite.
As of the third quarter, the full-year guidance has been hiked.
Total product sales are now expected to be in the range of $26.7 to $26.9 billion, with base business sales expected between $24.8 and $25 billion, reflecting the aforementioned 7-8% growth range.
According to Gilead, over the past three to four years, it has focused on significant investments in research and development (R&D), resulting in an expanded and strengthened portfolio.
The company believes that its R&D investments now align with industry standards, leading to a robust pipeline that positions it for sustained growth.
Hence, the upcoming years are expected to witness a series of clinical catalysts across the entire portfolio.
For example, in 2024, Gilead anticipates several clinical catalysts, including Phase III second-line non-small cell lung cancer data for Trodelvy and Phase III prevention data for HIV.
The third quarter showed promising Phase II data for Trodelvy in combination with pembrolizumab for first-line metastatic non-small cell lung cancer.
This development underscores Trodelvy's potential as a crucial treatment alternative for patients. The broader clinical pipeline comprises 60 ongoing programs spanning virology, oncology, and inflammation.
Furthermore, Trodelvy, delivered to over 20,000 patients across three indications, stands as the first and only TROP-2 antibody-drug conjugate with meaningful overall survival benefits.
According to the company, the unique ADC construct, with a high drug-to-antibody ratio, demonstrates a potentially differentiated safety profile.
The ongoing clinical development program involves over 30 trials across eight tumor types, with clear signals of activity reported in various indications.
Gilead also continues to expand cell therapy benefits with eight ongoing trials exploring new indications and settings. The focus includes allogeneic CARTs, natural killer cells, and invariant natural killer T cell therapies. The Phase II EDGE-Gastric study and ongoing trials contribute to strengthening the clinical evidence for CART-ddBCMA, Yescarta, and Tecartus.
In the third quarter, the oncology business achieved a 33% year-over-year sales increase to $769 million, with an annual run rate exceeding $3 billion, proving that oncology is rapidly becoming a large part of the total sales picture.
On top of that, even the HIV business is showing promising developments. The upcoming Phase III capsid PrEP data is expected to be a major driver for reaccelerating growth, particularly by providing a once-every-6-month injection option.
In the third quarter, HIV sales, driven by higher treatment and prevention demand, were up 4% year-over-year to $4.7 billion. Biktarvy, the leading regimen, achieved sales of $3.1 billion, up 12% year-over-year, maintaining its dominance in the market.
Descovy sales were $511 million, up 2% year-over-year, with strong demand for Descovy for PrEP despite pricing challenges.
During the Jeffries conference, the company emphasized the transformative potential of its growth catalysts and expects them to drive substantial growth in the future.
So far, Gilead's pipeline progress is substantial, with 27 programs in Phase II and 19 in Phase III.
Shareholder Returns & Valuation
GILD shareholders benefit from both dividends and buybacks.
In 3Q23, the company paid close to a billion dollars in dividends and bought back shares worth $300 million.
In addition to maintaining a strong R&D pipeline (which is its bread and butter), the company aims to maintain consistent dividend growth.
The company currently pays a $0.75 per share per quarter dividend. This translates to an annualized yield of 4.0%.
This dividend is protected by a sub-50% payout ratio. It has a five-year CAGR of 6%. On February 2, the company hiked it by 2.7%. The company has a strong balance sheet with a BBB+ credit rating. That is one step below the A-range.
I expect dividend growth to pick up the moment GILD sees faster overall growth, fueled by drugs that are now close to the end of its research pipeline.
Valuation-wise, GILD is trading at a blended P/E ratio of 11x. That is a very fair valuation, as the company had no growth for almost a decade.
Next year, EPS is expected to grow by 8%, which I expect to last, especially if the company is able to turn its pipeline into successful product launches with support from existing drugs.
Going back to 2002, the stock has traded at a normalized P/E ratio of 18.6x.
I believe that valuation is warranted if the company's ambitious growth plans turn into reality.
As I'm optimistic, I believe the stock has room to rise to the $100 to $120 range. $120 is the implied fair valuation based on expected EPS growth and an 18.6x earnings multiple.
Beyond that, I wouldn't bet against a more sustainable uptrend, which could generate substantial value in light of the 4.0% dividend yield.
Takeaway
Despite recent stock declines, Gilead's robust pipeline, especially in oncology and HIV, points to sustained growth.
With dividends, buybacks, and an attractive valuation, GILD offers a compelling risk/reward profile.
As it navigates transformative catalysts, including Trodelvy's potential and HIV advancements, Gilead's path to $100 per share seems plausible.
Watch for upcoming clinical data and expect dividends to surge alongside accelerated growth, making GILD an intriguing prospect for investors eyeing long-term value.
For further details see:
4%-Yielding Gilead Sciences' Potential Path To A $100 Stock Price