EUR 850.00 For Business Accounts Only

Morningstar | Gilead Returns to Growth in 1Q, at Least Temporarily; Shares Incorporate Bearish Pipeline View

We're maintaining our $78 per share fair value estimate for Gilead following solid first-quarter results and an encouraging first earnings call with new CEO Daniel O'Day. Overall, we expect Gilead to focus on defending its HIV franchise, allowing Kite to innovate as a separate, oncology cell therapy business unit, maximizing a potential launch of immunology drug filgotinib in 2020 and partnering in NASH to continue to test new combination regimens. Total revenue grew 4% in the first quarter, the first quarter of year-over-year growth in three years, as 14% HIV growth and Yescarta's launch were able to counter the 24% decline in hepatitis C revenue. While top-line growth will likely dip negative again this year as Gilead continues to fight hepatitis C declines and also loses cardiopulmonary drugs Letairis and Ranexa to generic competition, we think shares incorporate an overly pessimistic long-term evolution for the firm's pipeline. We continue to view the firm's HIV and HCV portfolios, as well as emerging oncology and immunology pipelines, as supporting a stable, wide moat.

In HIV, U.S. sales declined sequentially, with a $400 million headwind due to inventory drawdowns and payer mix, but Biktarvy's launch continues at an impressive rate, with $739 million in U.S. sales in the quarter to solidify its rank as the top HIV treatment for new and switching patients. However, Gilead will have to contend with new competition from Glaxo, as two-drug regimen Dovato was approved in the U.S. in April and has a list price 26% below that of Biktarvy. While Gilead has been stealing share from Glaxo since Biktarvy's launch, we expect market shares should stabilize as Dovato launches, particularly if long-term data continue to support the efficacy of the two-drug regimen.

Gilead's Truvada continues to see strong uptake in pre-exposure prophylaxis, with 200,000 on therapy and a total of 1.1 million patients in the target market (according to CDC estimates), and in March, a head to head study of Descovy versus Truvada showed Descovy to be non-inferior on efficacy and offering a better renal and bone safety profile. While Gilead expects Descovy's approval in this indication in the fourth quarter, we see these safety benefits as relatively modest, leaving some room for generic Truvada to compete in this indication in 2021.

Beyond HIV, Gilead's Yescarta sales are growing in the U.S. as reimbursement improves and more centers are trained on administering CAR-T therapy. We see this as a competitive area, but we're encouraged by Gilead's decision to move an off-the-shelf CAR-T therapy into development in 2020, as this would likely significantly lower costs of production and eliminate patient wait times.

Gilead's most promising pipeline therapy is filgotinib, which produced strong phase 3 data in rheumatoid arthritis and will be filed in Europe this year. Gilead will meet with the FDA to determine the timing of its U.S. filing. We think testicular safety data may not be available until next year, and we expect Gilead is hoping for a clean safety profile on its safety label, based on recent phase 3 data. We also see Gilead as a long-term player in NASH, as internal combination regimens as well as new partnerships should help the firm build a portfolio (albeit in the long run).

In the wake of selonsertib's failure in two phase 3 studies in NASH, Gilead is focused on the phase 2 study of combinations of its remaining two advanced drug candidates in the disease, its FXR agonist cilofexor and ACC inhibitor firsocostat. Data at EASL in April showed data for this combination from a small study, with improved hepatic steatosis (reduced liver fat) apparently driven by firsocostat, as well as reduced liver stiffness, reduced fibrosis, and improved liver biochemistry driven by both compounds. The safety profile was also encouraging, with no serious side effects deemed treatment-related. Gilead has also recently expanded its collaborations in the space, as Gilead and Novo Nordisk will begin a proof-of-concept study combining Novo's oral GLP-1 semaglutide with cilofexor and firsocostat, and an Insitro partnership focused on discover new NASH targets with Insitro's platform.