Company Overview: Gilead Sciences, Inc. (NASDAQ: GILD) has its headquarters in Foster City, California and is involved in the development of drugs for the therapy of human immunodeficiency virus (HIV), liver diseases, inflammation/respiratory diseases, and hematology/oncology disease. The company has a solid HIV agreement with key HIV/AIDS therapies. The company’s portfolio also comprises hepatitis C virus (HCV) drugs like Harvoni and Epclusa and HBV drug, Vemlidy.

GILD Details

GILD Rides on Collaboration and FDA Approvals: Gilead Sciences, Inc. (NASDAQ: GILD) is engaged in the development of drugs for the medication of human immunodeficiency virus (HIV), hematology or oncology illnesses, liver diseases, & respiratory disorders. The company’s initial cell therapy, Yescarta, which was approved for the treatment of adult patients suffering from degenerated or refractory large B-cell lymphoma has aided the company to diversify its product portfolio. Cell therapy product sales which consists of mainly Yescarta and Tecartus stood at $607 million in 2020, depicting an increase of 33% year over year, owing to the continued uptake of Yescarta in Europe and product introduction of Tecartus in the United States.

The company has a strong late-stage pipeline that augurs well for long-term growth. The company is working on expanding and developing its business beyond antivirals into other therapeutic areas. It is also strengthening its foothold in the oncology space with strategic collaborations and purchases. In 2020, GILD bought an oncology company, Immunomedics, for ~$21 billion, which added breast cancer drug Trodelvy to its portfolio. The company received approval from FDA to treat patients with COVID-19 with its Veklury (remdesivir) product. The European Commission (EC) also granted conditional Marketing Authorization to the same product. In FY20, sales of Veklury came in at $2.8 billion, reflecting higher hospitalization and treatment rates in Europe and the US, owing to the surge in COVID-19 cases.  The company has also joined forces with Novo Nordisk to build drugs for the treatment of NASH.

Recently, the company informed the market that it has been granted a nod from the FDA for treating locally advanced or metastatic urothelial cancer (“UC”) in adult patients with its key drug product, Trodelvy (sacituzumabgovitecan-hziy). The nod for UC signal marks the second FDA approval for Trodelvy. The worsening of the coronavirus pandemic is driving the sales for Veklury (remdesivir) in FY20. This indicates resilient results for the fourth quarter as well. Markedly, the improvement in Viral Hepatitis, further bolsters the core antiviral business of the company. The company projects hepatitis B virus (“HBV”) sales to be more than $1 billion by 2022.

HBV Sales Glimpse (Source: Company Reports)

4QFY20 Key Highlights: During the quarter, the company reported earnings of $2.19 per share as compared to $1.10 per share reported in the year-ago quarter. Total revenues in 4QFY20 came in at $7.4 billion, which went up ~26% year over year, owing to increased demand for Veklury for the medication of patients suffering from COVID-19 virus. In 4QFY20, the company reported an adjusted product gross margin of 87.5%, up from 75.6% reported in the year-ago period.

Total product sales during the quarter came in at $7.3 billion, depicting an increase of 26% year over year. HIV product sales, however, decreased 7% year over year, owing to the loss of exclusivity of Truvada and Atripla in the US in October 2020. In 4QFY20, Cell Therapy product sales, which include Yescarta and Tecartus stood at $163 million, up 34% year over year, owing to continued uptake and expansion of Yescarta in Europe.

During the quarter, the company recorded $1.9 billion sales from Veklury. The FDA awarded full consent to Veklury for the therapy of patients with COVID-19. It was earlier granted an Emergency Use Authorization (“EUA”) by the FDA. Trodelvy recorded revenues of $49 million sales during the quarter in the United States, aided by the buyout of Immunomedics in October 2020. Trodelvy was awarded enhanced approval by the FDA in April for the therapy of adult patients suffering from metastatic triple-negative breast cancer (“mTNBC”). Other product sales stood at $498 million, depicting an increase of 7% on pcp.

Net Product Sales (Source: Company Reports)

Key Metrics, Liquidity & Balance Sheet Details: The company exited the quarter with cash and cash equivalents and short-term marketable securities of $7.4 billion (as of December 31, 2020). Long-term debt at the end of the period came in at $28.6 billion. Adjusted debt to adjusted EBITDA ratio at the end of 31 December 2020 came in at ~2.65x. During FY20, the company recorded $8.2 billion in operating cash flow. The company also issued senior unsecured notes in an aggregate principal amount of $7.25 billion in FY20 and had an aggregate principal amount of ~$1.0 billion under a three-year term loan facility. The company utilized the cash to repay $2.5 billion of principal amount of debt, and also enhanced shareholder’s value via cash dividends and share repurchase of $3.4 billion $1.6 billion, respectively. For 2021, the company aims to increase its dividend and pay down a minimum of $4 billion of debt. We opine that the available cash will facilitate it to pay off debt commitments as well as it will provide higher compensation to shareholders.

In FY20, operating, EBITDA and net margins stood at 16.5%, 22.5% and 0.4%, higher than the industry median of -216.5%, -150.7% and -159.8%, respectively. In FY20, gross margins stood at 81.5%, higher than FY19 figure of 79.2%.

Growth and Gross Margin Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 39.9% of the total shareholdings while the Top 4 constitutes the maximum holding. Capital Research Global Investors, and The Vanguard Group, Inc. are holding a maximum stake in the company at 9.68% and 8.18%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Risk Analysis: The company’s exposure to the international markets intensifies the risk of foreign exchange volatility. For the year ended December 31, 2020, ~26% of the company’s product sales came from outside the United States. This implies that the company has a massive percentage of its

product sales denominated in foreign currencies, which exposes the company to adverse movements in foreign currency exchange rates. The company continues to acquire a larger number of companies, which adds to the integration risk. Further, the company is exposed to short-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. Stiff competition from peers, leveraged balance sheet and stringent regulatory approval adds to the woes.

Outlook: In FY21, the company expects total product sales to be in the range of $23.7-$25.1 billion. For the same time period, sales from Veklury are projected to be in the ambit of $2-$3 billion. The company expects EPS to be between $6.75-$7.45 in FY21. The company remains on track to witness a gradual recovery in underlying market dynamics, commencing from 2QFY21. Further, the company’s key product drugs Trodelvy, Biktarvy, Vemlidy and cell therapy are expected to be the key growth drivers in FY21.

Outlook (Source: Company Reports)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, the stock went up by ~6.1%. The stock made a 52-week low and high of $56.56 and $85.79, respectively. On the technical analysis front, the stock has a support level of ~$63.43 and a resistance level of ~$69.43. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight premium as compared to its peer’s median, considering, the acquisition synergies, increased demand for Veklury for the medication of patients suffering from COVID-19 virus, along with growth in top and bottom-line in 4QFY20. We have taken peers like Abbvie Inc (NYSE: ABBV), Merck & Co Inc (NYSE: MRK), to name a few.  Considering the company’s decent 4QFY20 performance, geographical expansion, decent outlook, approval from FDA, robust adoption for its key products, synergies from buyouts and valuation, we give a “Buy” recommendation on the stock at the closing price of $65.3, up by ~0.63% on 14 April 2021.  

GILD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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