Can Gilead Stock Decline Further From $60?

by Trefis Team
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Despite a 25% decline in Gilead Sciences stock (NASDAQ:GILD) since late April this year, at the current price of $63, we believe GILD stock has more downside. Why is that?  This can be attributed to the newer treatment options for Covid-19, including Dexamethasone and convalescent plasma gaining momentum, implying lower reliance on Gilead’s Remdesivir in the near future. Our dashboard, ‘What Factors Drove -4% Change In Gilead Stock Since 2017‘ has the underlying numbers, and we discuss more below.

The stock has largely remained around the $60 level over the past few years due to its lackluster fundamentals. The company has seen a 14% decline in revenues from $26.1 billion in 2017 to $22.4 billion in 2019. The figure stood at $10.7 billion in the first half of 2020, and despite the uptick in the much talked about drug Remdesivir, the average consensus revenue estimate for 2020 is $24.2 billion, reflecting a mere 8% y-o-y growth. However, earnings growth, on a per share basis, was much better with 20% growth, driven by expansion of Net Margins from 17.8% to 23.9% along with share buybacks resulting in a 3% decline in total shares outstanding.

Finally, Gilead’s P/E ratio declined from about 18x at the end of 2017 to 15x in 2019. While Gilead’s P/E is still at about 15x now, given the volatility of the current situation, there is an additional possible downside for Gilead’s multiple when compared to levels seen in the past years – P/E of 14x as recently as in late 2018.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus has meant fewer regular visits to hospitals, impacting the sales of pharmaceutical companies. For Gilead, sales were already slower entering into 2020, and Remdesivir provided a hope for strong sales growth, along with some of the company’s other drugs in the pipeline. While Remdesivir did secure the FDA’s Emergency Use Authorization (EUA) for the treatment of severely ill as well as moderate cases for Covid-19, the newer treatment options have emerged over the recent past, which could possibly offer more effective treatment. [1] For instance, European Medicines Agency (EMA) has recently backed Dexamethasone for the treatment of Covid-19 patients that require oxygen support. The U.S. FDA last month granted an EUA to convalescent plasma as well as another treatment option for Covid-19 patients. On the other hand, some of the studies have found Remdesivir to be minimally effective for Covid-19 treatment. This has not boded well for the stock of late, and this trend could continue in the near term.

Now, even if we were to look beyond Remdesivir, Gilead’s growth prospects dwindled after the US FDA rejected its Filgotinib drug for rheumatoid arthritis. This was a big blow to Gilead, as the peak sales for Filgotinib are estimated to be as high as $4 billion in all potential indications. It is not that the drug will not get approved, but the FDA’s rejection in the current form likely meant a delay of a year or more for Gilead in securing the approval. Again, this doesn’t bode well for the stock in the near term.

Looking at the broader markets, over the coming weeks we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again. For Gilead stock, the important factor to watch out for is the traction in treatment options other than Remdesivir for Covid-19 in the near term.

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Notes:
  1. The Journal of the American Medical Association []
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