Gilead Sciences (NASDAQ: GILD) watched its share price go down by almost 5% as a result of an unexpected adverse ruling by the FDA against Filgotinib. Filgotinib, a drug created in collaboration with Galapagos (NASDAQ: GLPG) caused that company’s share price to drop by 25%, a stock that Gilead Sciences also has a significant stake in.
The FDA rejected the with the following announcement:
Now, that’s all been thrown into question. Gilead said Tuesday evening that the agency had issued a so-called complete response letter to the company’s application for filgotinib, saying that it wanted data from ongoing studies on the drug’s impact on patients’ sperm counts before it made a final decision on the drug.
In addition to the questions around the drug’s impact on sperm count, Gilead said that the FDA had “expressed concerns” about the risk/benefit profile of a 200 milligram dose of the drug.
The FDA announcements causes two significant points of concern. The first is simple – the company is concerned about the risk/benefit profile of a 200 milligram dose. More data is needed here, however, the potential indication is that Filgotinib will have a less competitive drug profile. That could hurt the earnings of the drug when it comes out.
However, the much more concerning aspect is the requests for impact on patient sperm counts. Those tests are already underway, but they’ll take a year to be released. By the time they come out competitors to Filgotinib will have come underway. Peak sales for the drug are estimated at $4 billion – delays can be costly.
More so, it could allow competitive drugs to come out. It also potentially means that the results of these studies will cause the drug not to be approved. The approval of the drug remains to be seen but this is a setback in the company’s long-term revenue potential.
Gilead Sciences Portfolio
Fortunately, the remainder of Gilead Sciences’ portfolio is incredibly impressive outside of Filgotinib.
Gilead Sciences has an incredibly exciting portfolio of assets supported by its market leading HIV portfolio. The company had 1H revenue of $8.1 billion from HIV alone with annualized revenue at more than $21 billion. The company has a market capitalization of more than $80 billion giving it a price to sales ratio of almost 4.
The company has incredibly strong margins with 1H non-GAAP net income of $3.5 billion after taxes (more than $7 billion annualized). That gives the company a low double-digit P/E ratio. That P/E ratio highlights the strength of the company’s existing profile including its market leading HIV portfolio. That portfolio will support long-term shareholder returns.
Gilead Sciences Remdesivir
At the same time, the strength of Gilead Sciences portfolio is visible through Remdesivir which will cost several thousand $ per treatment course.
Gilead Sciences Remdesivir – Gilead Sciences Investor Presentation
Gilead Sciences gave away a significant part of its existing supply but is working to add nearly 2 million cumulative treatment courses by YE. That will earn the company billions in additional revenue as countries clamor for anything that can help stop COVID-19. As the drug spreads across the world, Remdesivir helping hospitals will be huge.
These other new drugs will help support Gilead Sciences.
Gilead Sciences Shareholder Rewards
Gilead Sciences impressive cash flow will help to support overall shareholder rewards.
Gilead Sciences EPS – Gilead Sciences Investor Presentation
The above graph shows Gilead Sciences’ past non-GAAP EPS, which is expected to be roughly $7 for 2020. The company’s quarterly dividends are $0.68 / quarter, well affordable through the company’s quarterly non-GAAP EPS. That provides investors a dividend of more than 4% as the company continues to generate impressive cash flow.
The company had recent short-term non-GAAP EPS difficulties due to bringing Remdesivir online and changes in purchasing drugs. That was $0.40 / share in the most recent quarter. However, going forward, it’s expected to increase dramatically. The company has utilized short-term share repurchases and the share price drop could enable that to continue.
Gilead Sciences has used its financial strength to dramatically reduce its outstanding shares. The small boost in the middle there is from the company’s acquisition of its Hepatitis C drugs, however, since 2005, the company has reduced its share count by roughly 35%. That’s a ~2.3% annual reduction, which adds on to the dividend to give a high-single digit shareholder rewards.
This highlights the company’s continued commitment to strong shareholder rewards. These rewards make investing now opportunistic.
Gilead Sciences Risk
However, there are some risks that investors should pay close attention too. Pharmaceutical companies need to continuously invest billions in research and development, and even then, as Filgotinib has shown, there is consistent risk. That risk can place strong negative impact on shareholder returns and it can result in volatile share prices.
This is a risk that investors should continue to pay close attention to.
Gilead Sciences has an impressive portfolio of assets that it’s utilized to generate strong long-term returns. The company has recently seen a major setback from Filgotinib, but the remainder of its portfolio is high quality and generating significant cash flow. That cash flow will point towards future shareholder rewards.
The company has continued to develop its HIV portfolio. The company is also working on its HCV portfolio to continue generating respectable cash flow. Filgotinib failed, however, Remdesivir has the ability to generate billions in FCF by the end of the year. Going forward, we recommend investing in Gilead Sciences despite this news.
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Disclosure: I am/we are long gild, GLPG. 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.