Investment Thesis
Gilead’s key competitive advantages lie in its structural advantages and leadership in pharmaceutical development and commercialization across a vast array of therapeutics addressing unmet needs.
Drug portfolio: Gilead’s approved (and future approved) drugs are by nature long-term revenue generators, because the majority of them aim to treat chronic illnesses. The development has also been focused on life-critical treatments, so price elasticity of demand should be very low. Gilead has shown this through its leadership in HIV treatment and prevention (Truvada and Atripla). Gilead has also found a viable cure for Hepatitis C with its Sovaldi and Harvoni drugs, as well as its newest single-dose Epclusa (approved in 2016) and Vemlidy (approved 2016).
Beyond its current slate of impactful treatments, Gilead has a valuable array of drugs in progress, including hematological/oncological, inflammatory/respiratory candidates in phase 3 clinical trials. For example, Idelalisib would address patients with relapsed leukemia, and an investigational antibody, GS-5745, would treat gastric cancer. Both are increasing in prevalence today.
Partnership/Scale: Being a larger player in the antiviral and antiretroviral (and increasingly, chemotherapeutic) space affords Gilead the ability to acquire competencies, assets and talent to fuel research and development. The Gilead team has shown capability in making value-additive acquisitions. For instance, its acquisition of Triangle Pharmaceuticals enabled development of HIV treatments, and its 2006 acquisitions of Corus Pharma for $365M paved the way for entry into the respiratory space. By acquiring Pharmasset in 2011, Gilead capitalized on existing R&D at the firm to develop its acclaimed Sovaldi.
Finally, Gilead is able to capitalize its reputation to partner with other companies on higher-risk drug development. Last year, Gilead closed on a collaboration and licensing agreement with a clinical stage firm, Galapagos, to develop a phase 3 drug with three potential indications: rheumatoid arthritis, Crohn’s disease, and ulcerative colitis, all three of which are markets with expansion opportunity.
Cheap option: Gilead is trading at such a cheap multiple that it is akin to paying a small premium for the optionality of the next blockbuster. From a policy perspective, the new administration may be more open to M&A activity, which would benefit Gilead’s business model.
Valuation
Gilead Sciences is currently undervalued at $67.10/share, representing a $87.7B market capitalization (as of April 3, 2017 market close). This reflects a 6.8x P/E ratio, which is extremely low compared to its peers of similar size and therapeutic areas (including Amgen, Celgene, Novo Nordisk, Biogen, Shire, CSL and Regeneron) as seen in Fig. 1. Gilead is favorably positioned to continue growing in the therapeutic areas for which it has market power, as well as in transformative new pipeline drugs that could prove to be blockbusters. Even with a sizeable discount to peers, Gilead should trade at least in the 10-12x range or about $96.27/s - $115.52/s.
