EUR 850.00 For Business Accounts Only

Morningstar | Gilead Shares Undervalued During Management Transition; Pipeline Outweighs HCV Headwind

Gilead's performance in the third quarter was largely in line with our expectations, with product sales down 15% as HCV declines outweighed strong performance in HIV. Management also raised revenue guidance for the year to $20.8 billion-$21.3 billion to account for weaker-than-expected generic HIV competition in Europe and delayed generics for PAH drug Letairis in the U.S. Gilead's new guidance fits well with our prior $21.2 billion forecast, although our new forecast ($21.7 billion) is again slightly ahead of guidance. Given recent positive data for immunology drug filgotinib in multiple indications, encouraging reimbursement improvements for CAR-T therapy Yescarta, and upcoming NASH data in the first half of 2019, we're maintaining our $86 per share fair value estimate, and shares look undervalued. We think investors are underestimating the stability that will result when lower HCV sales annualize, and we expect investors could be comforted when the firm announces a new CEO (expected later this year). We continue to think Gilead's established HIV portfolio and newer drugs in oncology, immunology, and NASH support a stable, wide moat.

Diving deeper into NASH, we're optimistic on upcoming phase 3 data for selonsertib in advanced fibrosis and cirrhosis patients, but we're particularly interested in combination data from the Atlas study, which is on track to become available by the end of 2019. For more detail on our NASH market analysis, please see our recent Healthcare Observer "NASH Market Opportunity Undervalued, With Lack of Credit to Wide-Moat Gilead and No-Moat Intercept."

HIV strength once again countered HCV weakness, although we saw encouraging signs in both businesses. Gilead's U.S. HIV business performed very strongly, as new combination pill Biktarvy drove 19% growth in U.S. HIV revenue (11% volume growth). Global HIV growth of 12% was weighed on by an 11% decline in Europe, as generics launch for Gilead's older regimens, but generic impact has been less than anticipated, and Gilead's Descovy is seeing strong uptake, countering Truvada declines.

In HCV, Gilead saw a 10% sequential decline in sales; however, rapid (50%-plus) declines begin to annualize in the fourth quarter, and new authorized generic versions of Gilead's top HCV drugs Harvoni and Epclusa, launching in January in the U.S., could help stabilize revenue next year. These products will launch at a list price similar to net prices of the branded versions ($24,000), but the lower list price should help Gilead penetrate Medicare Part D (lower out-of-pocket costs for patients) and state-managed Medicaid (which does not see the same net prices on the branded versions as privately covered patients). This plan also dovetails with Trump administration efforts to lower out-of-pocket costs, which are often based on list prices. Gilead is also looking at subscription models as another innovative pricing strategy, where a state might pay Gilead a fixed amount to treat an unlimited number of HCV patients over a given time. We expect stabilization in Gilead's HCV franchise, with perhaps a slight step-down as Gilead competed for formulary status with Mavyret in 2019 (see the Express Scripts decision to exclude Mavyret).

$75 million in Yescarta sales showed slower growth than prior quarters, but Gilead is working on increasing adoption at treatment centers in the U.S. and just beginning to launch in Europe, where Yescarta was approved in August. In addition, U.S. reimbursement improved in October with a new add-on payment for hospitals, although reimbursement is still more complicated than for other hospital-administered therapies (as treatment is typically given on an in-patient basis).