- The market sometimes offers unique opportunities; right now, Gilead’s HCV franchise is on sale.
- In addition, the pipeline comes free when buying Gilead shares.
- Downside risk should be limited.
I believe that investors buying Gilead Sciences, Inc. (NASDAQ:GILD) will be rewarded in the near future, as on top of a cash flow-generating machine, they will be given an extensive pipeline and will be paying next to nothing for it.
I will jump right into the numbers to back up my claim. Gilead has 2 major revenue sources: HIV and HCV.
The HIV franchise
- Over the past 7 quarters, Gilead has grown revenues at an average of 4.1% Quarter-over-Quarter.
- Over the past 7 years, the company has grown revenues at an average of 14.1% Year-over-Year.
- The franchise grew even during the 2008/2009 market meltdown.
(Based on Gilead’s SEC filling)
According to the CDC, there are 47,000 new HIV diagnoses per year. This adds to existing patient base of 572,000, based on Gilead’s latest Q3 and Q4 fillings. Since the company’s current share of the HIV market sits at around 82%, it would be fair to say that around 38.500 patients a year will end up using one of its drugs. That is around 6.7% extra per year.
I believe that it would be fair to say that the HIV franchise is in a growing environment, it does not show signs of decay, and most likely, it will continue to grow at a decent pace for the years to come.
One could also argue that this revenue stream is even protected from a potential recession; I am not saying one is coming, but if it does, HIV drugs (or any drugs, for that matter) will be the last ones to suffer.
My objective here is to try value the HIV business as a standalone unit. My assumption for the earnings below is that if we consider a 50/50 revenue split between HCV and HIV, we can also consider a 50/50 R&D and SG&A split between HCV and HIV.
Based on the premise above, in 2015, Gilead will make $2.90 per share, thanks to its HIV franchise. (Based this figure on a 75% gross margin for the HIV franchise.)
Now, based on those earnings, and assigning the HIV franchise a larger multiple in comparison to that of Gilead as whole, we reach the following per share value (based on the HIV franchise only):
Now, let’s take a look at other sources of revenue – Letaris / Ranexa / Ambisome / Zydelig – that are also in a growing environment. In this case, I will do a similar exercise as I did for the HIV franchise, but adding no R&D nor SG&A expenses (as those are paid already by the HIV and HCV franchise).
I estimated that the Earnings Per Share for these are coming at around $0.60 per share.
The HCV franchise
Revenues for 2015 will be something like this. (Maybe the U.S. is more and Japan less, but it might end up being something like this.) This is in line with Gilead’s own forecast for 2015 (the total forecast):
- USA $9.3 billion
- EU $3.7 billion
- Japan $1.1 billion
Now, we do the same exercise as we did for the HIV and Others, adding a 50/50 split of R&D and SG&A, and considering the tax rates and profit margins – in this case, I am using 90% gross profit for the HCV franchise. This exercise gives me a figure of $5.10 per share in 2015.
Please note that I am using different multiples for the HCV franchise – starting at 10 and up to 14 – due to the uncertainty surrounding prices and market share for HCV going forward.
Sources of revenue coming from HIV and Others (Letaris / Ranexa / Ambisome / Zydelig), I would say come with a medium-to-high degree of probability – meaning, we should be able to apply a larger multiple to them. Would it not be fair to price those using a 20 multiple, like most Bio/Pharma companies? (Actually, most Bio/Pharmas come with even larger multiples.)
The HIV franchise is very close to being a monopoly. Gilead is an established player, and will not lose its market share that easily. This is why I believe that a larger multiple for the HIV franchise should be accepted.
Thus, not counting the HCV franchise, if we add HIV + Others, we end up at $70.00 per share – ($58+ $12) – using the share value for each option at a 20 multiple.
Now, if we add the lowest multiple option for the HCV franchise, we should be looking at Gilead’s share price somewhere close to $70 + $51 = $121. (With 51 being the $5.10 per share times a 10 multiple.)
That would be, I believe, a fair breakeven. If you invest in Gilead right now (stock price $97 at the time of writing this article), I believe you will gain up to $25 a share worth of upside, thanks to the HCV franchise and an additional for its pipeline. How much more is uncertain, but it is certainly more than $0 as it is priced today.
Good luck to everyone trading out there.