The current Gilead Sciences (GILD) predicament with Remdesivir highlights the financial hiccups with finding treatments for pandemics. The stock hasn’t benefited since the pandemic hit the U.S. despite the drug becoming a key emergency approved treatment for COVID-19 in the U.S. and Europe. My bullish investment thesis has spun more neutral on the stock rally into the mid-$70s where value exists going forward.
Image Source: Gilead Sciences website
Too Much Spending
Unlike the small biotechs soaring from promising vaccines for the virus, Gilead Sciences is using an existing drug as a treatment for the virus. For a large biotech with a market cap near $100 billion, the market always will pressure such company to provide the drug at near cost due to the best interest of world health needs.
The large biopharma recently announced the pricing of the drug at $390 per vial for a total cost of $2,340 assuming a course of six vials are used to treat a COVID-19 patient. The amount sounds large until one considers the efforts undertaken by Gilead Sciences to produce the drug to have ample supplies for treatments considering the drug was still in testing.
Consider the company projects spending $1 billion this year on ramping up drug research and supplies. In addition, the biotech donated the first 1.5 million doses. The profitability from Remdesivir appears muted.
According to the Department of Health and Human Services, the U.S. already bought up 90% of the supply through September for U.S. hospitals. The amount secured equates to 500,000 treatments with the average patient consuming 6.25 vials of the drug. Gilead plans to produce the following monthly amounts:
- July – 94,200 treatments
- August – 174,900 treatments
- September – 232,800 treatments
Depending on the ultimate payor, the drug either costs $390 per vial or $520 per vial. The issue here isn’t the revenue expected from these drug sales, but the expenses in order to ramp up production along with donating product to the U.S. and allowing generics to sale the drug at no costs.
The company already discussed ramping up spending by $1 billion so even the 500,000 treatments at $3,200 each would only generate revenues of $1.6 billion which hardly offsets those costs. ICER had the cost/benefit analysis at $4,500.
No Earnings Benefit
Despite the promises of Remdesivir being a treatment for COVID-19 at a cost of $2,340 or more per person, analysts haven’t raised 2020 or 2021 earnings estimates by any meaningful amount. In fact, the three-month EPS trend for the next three years (’20-’22) is only around a 2% boost.
Source: Seeking Alpha earnings revisions
A big part of the issue is that some analysts were predicting Remdesivir pricing up to $10K per treatment. The problem is that Gilead Sciences has been pressured to charge more affordable amounts due to the pandemic fears.
The analysts have done all the work here and don’t conclude the company is going to make any profits off Remdesivir. Not to mention, Gilead Sciences wouldn’t look that good by profiting while so many in the world are suffering.
For this reason, the stock is in the mid-$70s and unlikely to rally much further. Gilead Sciences already is up about 15% off the previous mid-$60s level during a weak stock period. Investors have likely already seen the benefit here as the slumping daily deaths and a potential vaccine in the fall are likely to cap any expectations that huge demand for the drug continues into 2021.
Source: The Covid Tracking Project
Gilead Sciences could benefit from higher hospitalizations requiring more treatments and is part of the course leading to these lower death totals. What can easily argue that the biopharma should benefit financially in this case, but the market just isn’t going to allow it.
The key investor takeaway is that Gilead Sciences isn’t necessarily expensive here at 12x ’20 EPS estimates. The current risk is that the stock has 15% downside once Remdesivir is no longer needed for COVID-19 treatments. Investors are best to sit on the sidelines here waiting for a pullback in the stock.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.