Over two and a half years ago, I wrote a story arguing that Gilead Sciences (NASDAQ: GILD) was incredibly undervalued at $120 a share. With its shares recently trading around $81, I have more than a little egg on my face. I won't bore you with all the gory details of what I missed (and what I've learned), but you can read more here if you're curious.
Though I've been wrong about Gilead's share price thus far, I still see plenty of evidence for the strength of the underlying business. That's because management has shown impressive discipline in entering (and ultimately dominating) markets. For that simple reason, I believe Gilead's best days remain squarely ahead of it.
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Focus on big opportunities
At first glance, Gilead's drug portfolio may seem to be a little scattershot. You can stretch to find some classification similarities: Hepatitis C and NASH are both liver diseases, while HIV and autoimmune diseases relate to the immune system. CAR-T (chimeric antigen receptor T-cell) therapies, which Gilead invested heavily in with its purchase of Kite Pharma last year, point to treating cancer by amping up the immune system. Yet they're all still pretty broadly different diseases.
Nonetheless, it's clear that Gilead Sciences has a pretty specific strategy for which diseases it chooses to focus resources on. These indications all meet three criteria:
- Large patient population. The World Health Organization estimates that 71 million people worldwide have a chronic hepatitis C infection, and according to the Department of Health and Human Services 36.7 million people are living with HIV or AIDS. Cancer is frighteningly common (roughly 1.7 million Americans are diagnosed each year), although it isn't yet clear how many different indications CAR-T therapies will be suitable for. NASH is the rarest of these diseases, and it affects an estimated 3% of the U.S. population. That means every drug in Gilead's portfolio can (at least theoretically) be produced at scale, which helps leverage the company's size and ability to manage its supply chain. It also means that it can compromise on price and make up some of the difference in volume.
- Suboptimal standard of care. When Gilead entered each of these markets, the prognosis for disease sufferers was quite poor. HIV used to be essentially a death sentence. Potentially curing hepatitis C was a coin flip, with patients having to choose between taking drugs with nasty side effects over a long period of time or risking liver cirrhosis. Many autoimmune diseases carry brutal side effects only matched by the danger of the drugs patients must take to try to control their symptoms. NASH's primary treatment right now is diet and exercise.
- Step-change opportunity. Gilead stepped into each market to generate a big change for patients with a new best-in-class (or at least competitive) drug. Such was the case in both HIV (Truvada) and hepatitis C (Sovaldi). It's not yet clear whether the same dynamics will play out in CAR-T -- Yescarta is at least one of the top contenders, but it's too soon to tell whether it will be dominant -- or in NASH (where Gilead is still developing its initial drug portfolio). But that is at least what Gilead's management seeks when it goes into a new market: pricing power. (The business case is clear, which hopefully means the company doesn't have to rely on volume for profitability.)
After Gilead bought Triangle Pharmaceuticals and created Truvada as the backbone of HIV treatment, management could have declared victory and established a dividend. Instead, management plowed cash into building a better HIV portfolio, which ultimately led to the development of TAF to replace TDF in Truvada and other cocktails. TAF shows efficacy similar to TDF's, but with a significant reduction in the nasty side effects (particularly bone density reduction) that have forced many longtime TDF patients to switch to other HIV drugs. The result is clear: After watching its U.S. HIV market share gradually decline to just over 70% in Q3 2015, Gilead has seen a resurgence to 78% market share in Q3 2017.
The same story played out in hepatitis C. After the Pharmasset purchase, Gilead had legitimately the best hepatitis C drug on the market. Sovaldi had a shorter treatment window and fewer side effects than AbbVie's Viekira Pak, and its first-to-market advantage had Gilead in place to recoup, in just a couple of years, every dime it spent on Pharmasset and then some. Yet Gilead's management pushed forward, developing ledipasvir and combining it with Sovaldi to create Harvoni, which further reduced the side-effect profile by removing the need for interferon. And yet again Gilead self-disrupted, developing Epclusa, a true pan-genotypic drug that removed the need for genotype testing, removing another barrier to care. Hepatitis C sales grew and then fell swiftly as sick patients clamored for treatment -- and then were cured.
There's no reason to think Gilead won't do the same as it commits more resources to NASH, autoimmune diseases, and cancer.
What this all really means
Plenty of people espouse investing based on one metric or another -- and, to be clear, metrics absolutely should be part of any investing thesis. Yet if the numbers told the whole story (or were even that predictive), we'd have produced an algorithm by now that's far better at picking stocks than we are.
Healthcare is full of disruption, and today's unstoppable juggernaut quickly becomes tomorrow's also-ran. I believe that the biggest long-term moat in this space comes from a management team that shows superior talent in entering markets and managing drug life cycles. A company led by such a team can roll with the punches and stay ahead of the competition. By that measure, I believe Gilead has a clear advantage over its peers and is in position to make shareholders very happy over the long term.
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