Mar 25 2020 - Gilead's Remdesivir Can Be A Game Changer

Summary

Remdesivir has the potential to be a game changer in the fight against COVID-19.

We assign a 70% probability that remdesivir will be approved.

Remdesivir has revenue potential of .25bn-.9bn for over the next 18-36 months, providing 30-90% upside for Gilead market cap.

We remain bullish on Gilead and have used recent price action to accumulate a larger position.

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Editor's note: This article was amended on 3/25 to reflect updated information provided by Gilead.

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It is now well accepted that the widespread dissemination and severity of COVID-19 is a healthcare emergency. In our previous analysis, we outlined the base case for Gilead Sciences (GILD), should remdesivir prove to be effective and approved for the treatment of COVID-19. We envisage potential revenues based on governments purchasing remdesivir to deal with the current outbreak, as well as stockpiling for longer-term horizons. Based on recent developments, we provide an update to our model, with a revised valuation for Gilead. We continue to remain bullish and have taken advantage of recent dips in the stock price, to accumulate a larger position. Indeed, Gilead stock has held strong, despite the broader market sell-off.

Mild to Moderate Vs. Severe Cases

In our previous analysis, we assumed that remdesivir will be used to treat severe cases only. However, based on positive reports of a closely related anti-influenza drug, favipiravir (brand name Avigan), it is our view that remdesivir will also be used to treat mild to moderate cases, in an effort to prevent such patients deteriorating, as well as accelerate clinical resolution. To this end, Gilead is testing remdesivir in both mild-moderate and severe disease. This greatly expands the size of the treatable population in our model, now accounting for 100% of patients admitted to hospital.

Other Therapeutics and Risks

We have discussed the implications of chloroquine in our previous article. If chloroquine and favipiravir are equally effective as remdesivir, we assume remdesivir may be able to take 30% market share of hospital patients. Indeed, favipiravir has the advantage that it can be taken orally, whereas remdesivir is administered intravenously. We view this as a material advantage over remdesivir, as it enables wider use. However, head-to-head in vitro comparisons demonstrated that remdesivir was more effective than both chloroquine and favipiravir. Furthermore, as far as we can tell, chloroquine has not been tested in a randomised placebo-controlled trial, unlike the current trials of remdesivir. We thus continue to maintain that remdesivir has a good chance of outperforming chloroquine and favipiravir to become the standard of care. However, chloroquine (and the related hydroxychloroquine) may find significant use in the fight against COVID-19, which has the potential to reduce remdesivir's uptake. Investors considering a position in Gilead should understand this risk before investing.

Other therapeutics being trialled include the combination of anti-HIV drugs, lopinavir and ritonavir. However, this combination failed to provide benefit beyond standard of care, as we anticipated in our previous article. Although this is an unfortunate blow for the fight against COVID-19, the importance of remdesivir has increased as a result. Given the above factors, we believe the probability of remdesivir approval is now 70%.

Updated Target Valuation for Gilead

Here, we present an updated conservative model for the potential value that remdesivir can generate, if the drug is approved for COVID-19, and takes 30% market share. We assume that China and India will manufacture the drug for themselves independently of Gilead; however, should Gilead be able to strike a deal with these countries, there will be additional upside. Furthermore, we only include the population of countries who we believe will stockpile the drug (populations of: Europe, North America, Japan, South Korea, Hong Kong, Taiwan, Australia, New Zealand, Saudi Arabia, UAE, Kuwait, Bahrain, Qatar, Singapore, Israel and Russia). Note, this estimate excludes potential licencing revenues from China and India.

Regarding the cost of remdesivir, analysts at RBC Capital Markets, as reported by BioPharma Dive, assume a price per course of 0. We anticipate a different price per course; by using the price of a 5-day course of essential IV anti-infective drugs, we can arrive at various pricing scenarios outlined in Table 1 (see our previous article for specifics).

Drug PricingTable 1: Pricing Based on Key IV Anti-Infective Drugs (Source: British National Formulary and Eonia Research Calculations)

Note that the above pricing is based on price data available from the UK, which we expect to be representative of what most countries will pay for remdesivir. We use a 5-day course, as remdesivir is being trialled using a 5-day and 10-day dosing regimen. Model inputs are shown in Table 2.

Model InputsTable 2: Model Inputs (Source: Eonia Research)

Our model gives us estimated revenues from remdesivir, over the next 18-36 months, shown in Table 3.

Estimated RevenuesTable 3: Estimated Remdesivir Revenue (Source: Eonia Research Calculations)

We continue to maintain that the most likely price of a 5-day course of remdesivir will be between 7 and 9. Based on this price range, if remdesivir is effective in treating COVID-19 and is approved, we believe it can reasonably generate revenues between .25bn-.9bn for Gilead over the next 18-36 months. Upcoming trial results in April represent a significant catalyst.

Gilead trades on a Price/Sales multiple near 4.0x. This is nearer the lower end of its historical range over the last 7 years as can be seen in Figure 1.

Price to SalesFigure 1: Gilead Sciences Price to Sales Ratio 2013-2019 (Source: Bloomberg)

Applying a fair 4.0x Sales multiple under the above scenarios gives us target market cap scenarios shown in Table 4.

Target ValuationTable 4: Target Market Cap Scenarios for Gilead Sciences (Source: Eonia Research Calculations)

On this basis we believe Gilead stock could reasonably see an increase of between 30-90% (base case estimate range) from current levels based on:

  1. A lower-end assumed 2nd quartile pricing of 7 per course and a 50% population stockpile forming the lower-end price target of (+30%) of our base-estimate range.
  2. An upper-end assumed mean pricing of 9 per course and 50% population stockpile forming the upper end price target of £135 (+91%) of our base-estimate range.

Price Action

Gilead's 1-year daily price chart shows a clear breakout over following a sharp re-test (Figure 2)

Price ActionFigure 2: 1-year Daily Price Chart for Gilead Sciences (Source: Bloomberg)

Cumulative relative return charts vs. US Market (blue) and Biotechnology (yellow) confirm Gilead's recent price action is atypical (Figure 3).

Price Action 2Figure 3: Cumulative Excess Return of Gilead vs. S&P 500 and vs. S&P 500 Biotechnology Sub Index (Source: Bloomberg)

Financial Health Check

Given Gilead is an established biotech firm, it is in much better shape relative to smaller, early-stage peers. As of its latest Q4 2019 filing, Gilead has a negative net debt position of 2m (Figure 4) - i.e., it could theoretically pay off all its debts today and have 2m of cash remaining.

Enterprise ValueFigure 4: Gilead Sciences Enterprise Value (Source: Company Accounts, Eonia Research Calculations)

Gilead has bn of debt due in 2020 and .25bn due in 2021 - this is easily manageable despite the market turbulence being caused by COVID-19 (Figure 5)

Debt DistributionFigure 5: Gilead Sciences Annual Debt Distribution (Source: Company Accounts, Bloomberg, Eonia Research Calculations)

Gilead has very low cash burn for a biotech, we calculate Gross and Net Cash Burn Rates of 0.35 and 0.38 respectively (Table 5) i.e. Gilead has enough cash to cover its operating expenses for nearly 3 years. Adding to this, Gilead has a decent degree of operational flexibility as it can delay research to reduce operating expenditure, further reducing its burn rate.

Cash BurnTable 5: Gilead Sciences Cash Burn 2019 (Source: Company accounts, Bloomberg, Eonia Research Calculations)

Additionally, Gilead's planned .9bn acquisition of Forty Seven Inc. (FTSV) can still reasonably go ahead given the firm's strong financial position, which we anticipate will improve markedly in the coming months. Overall, we believe Gilead stock represents has an asymmetric risk/reward opportunity today for investors and we recommend it as a buy.

Disclosure: I am/we are long GILD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This material has been prepared by Eonia Research and is provided for information purposes only. The authors of this publication do not hold regulatory licenses and are not approved/licensed to provide investment advice. The information provided is not intended to provide a basis on which to make an investment decision. Any reference to potential positioning and potential returns do not represent and should not be interpreted as projections.

Accuracy

Neither Eonia Research nor any of its data providers or affiliates make any warranties expressed or implied, as to the accuracy, adequacy, quality or fitness for any particular purpose of the information or the services for a particular purpose or use and all such warranties are expressly excluded to the fullest extent that such warranties may be excluded by law. You bear all risks from any uses or results of using any information. You are responsible for validating the integrity of any information received over the internet or from us by any other means.

The information contained in this publication has been obtained from sources that Eonia Research believes to be reliable, but Eonia Research does not represent or warrant that it is accurate or complete. Eonia Research is not responsible for, and makes no warranties whatsoever as to, the information or opinions contained in any written, electronic, audio or video presentations of third parties that are accessible via a direct hyperlink in this publication or via a hyperlink to a third-party web site.

Liability

In no event shall Eonia Research, nor any affiliate, nor any of their respective officers, directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents.

The views in this publication are solely and exclusively those of the authoring analyst(s) and are subject to change, and Eonia Research has no obligation to update its opinions or the information in this publication. This publication does not contain personal investment recommendations or investment advice or take into account the individual financial circumstances or investment objectives of those who receive it. Any securities and other investments discussed herein may not be suitable for all investors.

The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not indicative of future results.



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