May 7 2020 - Even After FDA Approval Market Keeps Underestimating Gilead's Antiviral

The market is schizophrenic about Remdesivir.

Hints of its approval lift the entire market.

There are hopeful signals out of U.S. practitioners about the effectiviness of the treatment.

Yet, it is considered of modest value as a component of Gilead.

The market seems kind of schizophrenic to me in its opinion of Gilead (GILD) which produces remdesivir. The only treatment for COVID-19 that's been approved by the FDA for emergency use. On April 29 when it became clear, from a reliable study, that remdesivir would do some work on COVID-19, the news seemingly lifted the entire stock market. That's a remarkable feat.

What is puzzling to me is that the market doesn't appreciate the drug very much at all. There are speculative names that maybe have a Phase 1 trial (many months to go before possibly getting to market) for something that could potentially work on COVID-19 and no manufacturing capacity to speak off that double or triple in value but Gilead hardly moves.

To be fair, the company escaped the sell-off in March and is up 14% vs. the iShares Nasdaq Biotechnology ETF (IBB):

But over the past month, as it has become clearer remdesivir is actually effective, the company is down while biotech and the broader market are up sharply.

Almost as if the market anticipates the drug isn't really necessary because the virus isn't a big problem after all. I think that assessment is very, very wrong. I'm taking the other side of that trade.

The company has a lot of what I want in this market:

1) A number of therapies that are absolutely critical for patients (i.e. not optional treatments),

2) it has a cash hoard resulting in no net debt. That alone should have got it through the March sell-off better,

3) it is trading at ~10x cash flow AND

4) it has the only therapy on the market with emergency FDA approval. To treat a pandemic that, as I'm hammering this out has taken 262709 lives (that we know of) and we've registered 3.7 million infections. On the John Hopkins dash, you can track the curve and infections are flattening out but as we all know this has taken considerable effort on societies worldwide.

Many countries in Europe and North America are initiating some sort of reopening process. I have little doubt that's going to result in flare-ups here and there. In some places, it is going to work for a while. In other places, it is going to work for a very short period of time. Once healthcare systems get overloaded re-opening programs will need to be dialed back and that's one of the reasons remdesivir is so welcome.

I came across a tweetstorm by MD Francisco Marty and thought it was so interesting enough to share with you. It's a tweetstorm, not a scientific paper, of course. But it's good to get some color from someone who's out there on the floor for a change. I'm very interested to see what practitioners can do with this drug.

The profile says he's an Infectious diseases doctor who specializes in treating transplant and cancer patients, and works at @BrighamWomensn and @DanaFarber @harvardmed. Here's the tweetstorm:

Some things that got me pretty excited:

B) "this juice works doc!" This really makes me happy for the patients for who it - at least seemed - to work. I really hope it turns out to be more effective than research is indicating so far. Not because I own some shares but primarily for all the suffering it could prevent.

A) Get patients home in 2-4 days instead of 2-4 weeks (probably a bit of an overstatement but I hope so).

C) Shortening hospital stay means it can alleviate pressure on the hospital system and that is the KEY threat to societies. Once hospital systems get overloaded, the mortality rate soars.

A big effect on time in hospital will help with re-opening. I'm soon publishing additional notes on the re-opening but overall my stance is that it's not going to be so great as the market implies. Even if remdesivir is spectacular, there isn't enough capacity to resume life as before. The Gilead graph below clearly shows that production is somewhat limited:

This MD wants to blanket whoever gets into the hospital with this drug. Doesn't want to play the numbers game; young/old, etc. Just hook them up. That's positive for the total addressable market.

It really excited me to see an MD who treated 200+ COVID patients so positive about the treatment.

Gilead can produce about 1.2 million treatments per month near the end of the year. Currently, the company is ramping towards 400k per month. We are currently at 80k new cases per day. That's only the cases that actually get identified. Let's say 5% of new cases would benefit from remdesivir that means we are short 120k treatments per month at the current rate. Obviously, the virus spreads exponentially (we don't want to find out where it starts to level off organically) while production capacity does not ramp up exponentially. This tells me we life as we knew it pre-COVID won't be back for a while.