EUR 850.00 For Business Accounts Only

Morningstar | Gilead's HIV Franchise Stays Strong, but Lowering FVE on Shorter Window for Strong Yescarta Growth

Gilead's 2018 sales were in line with our estimates, and bottom-line performance was relatively in line with our estimates, after excluding a one-time excess inventory charge for older HCV therapy Harvoni on the cost of sales line that was recorded in the fourth quarter. However, with two generics launching (pulmonary arterial hypertension drug Letairis and angina drug Ranexa), continued hepatitis C pressure, and a relatively early growth trajectory for CAR-T therapy Yescarta, we think Gilead's rapidly growing HIV business should just be able to yield flat growth in 2019. Gilead is seeing Yescarta used at more transplant centers and the launch is extending to Europe, but management's forecast for 2019 is lower than we had forecast, and we're lowering our long-term Yescarta revenue as we expect additional competition in 2020 could make it more difficult for Gilead to rapidly gain share. After lowering our Yescarta and HCV estimates, and slightly raising our operating expense assumptions as Gilead prepares for potential launches of rheumatoid arthritis drug filgotinib and Nash drug selonsertib, we expect to slightly lower our fair value estimate. We still think shares look undervalued, and we continue to view Gilead's HIV and HCV portfolios and emerging businesses in oncology and immunology as meriting a wide economic moat. With new CEO Daniel O'Day to arrive in early March, we expect to see a potential late-stage or commercial-stage acquisition this year, as Gilead's HIV sales growth could begin to slow in 2020, just as Yescarta competition (Celgene's liso-cel) is poised to arrive.

Gilead's shares remain undervalued despite near-term weak growth potential, in our opinion, and we do expect some important catalysts for the firm in 2019, as we outlined in our recent Healthcare Observer, "Annual Drug Pipeline Report: Moats Remain Secure as Innovation Counters Pricing and Generic Headwinds, but M&A Accelerating." Descovy data in pre-exposure prophylaxis is expected in the second quarter; given that the CDC sees 1.1 million in the U.S. potentially benefiting from treatment, and Gilead only has 200,000 patients on Truvada, we think there is significant potential to not only refresh the Truvada PrEP franchise, but also reach additional patients in the United States. In Nash, selonsertib data in patients with advanced fibrosis or cirrhosis (two separate trials) is expected in the first and second quarter of 2019. If data are positive, Gilead estimates potential approval in the first half of 2020, followed by potential combination therapy approval in 2023 (following phase 2 data in the second half of 2019). While we're cautious on near-term selonsertib data, we're bullish on Gilead's ability to offer a combination regimen in the long run and see at least $2 billion in Nash peak sales. Gilead also expects rheumatoid arthritis data from two trials of filgotinib in the first quarter, and we're bullish on the drug's ability to compete with other JAK inhibitors based on data from the initial phase 3 study in RA. However, the FDA filing in this indication is dependent on the Manta safety study, which we expect may not be available until 2020.