This 5-Star Stock With a Dividend Yield That Tops 4% Is a Buy

Undervalued by more than 30%, the stock of this wide-moat company looks like a bargain to us.

Karen Andersen, CFA 5 June, 2024 | 1:26PM
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Gilead Sciences GILD has relied on its HIV and hepatitis C portfolio to drive profit margins. We think this wide-moat drugmaker’s liver disease portfolio is well positioned to generate continued growth, as are new long-acting HIV treatments, though competition is weighing on the company’s more rapidly growing oncology products. Gilead earns a place on Morningstar’s 2024 Best Companies to Own list. The stock is also one of Morningstar chief US market strategist Dave Sekera’s 5 Stocks to Buy While They’re Trading at Big Discounts.

Gilead Sciences generates stellar profit margins with its HIV and hepatitis C virus portfolio, which requires only a small salesforce and inexpensive manufacturing. We think its portfolio and pipeline support a wide economic moat, but Gilead needs HCV market stabilization, strong continued innovation in HIV, solid pipeline data, and smart future acquisitions to return to growth. Viread, Truvada, and older single-tablet regimens historically formed the heart of the company’s US$17 billion HIV franchise. However, the newest combo pills reduce bone and kidney safety issues and are seeing rapid uptake. The Genvoya, Odefsey, Descovy, and Biktarvy launches push patent protection into the 2030s and are boosting Gilead’s market share. Novel drug lenacapavir also has potential to extend Gilead’s patent protection. The acquisition of Kite and CAR-T therapy Yescarta is beginning to generate significant sales growth in oncology as the drug is used in earlier-stage patients, and the purchase of Immunomedics (breast cancer drug Trodelvy), as well as a collaboration with Arcus, adds to the oncology pipeline.


Key Morningstar Metrics for Gilead

Fair Value Estimate: US$97
Star Rating: 5 Stars
Economic Moat Rating: Wide
Uncertainty Rating: Medium

Economic Moat Rating

Gilead’s wide economic moat was formed by its leadership position in the treatment of HIV, with patented products that form the backbone of today’s treatment regimens. Despite numerous competitors, the company has established leading market share and spectacular profitability with its convenient, effective, and safe treatments. We estimate that Gilead holds a more than 60% share of the nearly US$30 billion global branded HIV market. We think patent protection on newer HIV regimens and Gilead’s continued dominance in the hepatitis C market will be enough to ensure strong returns for the next couple of decades. Gilead’s expertise in infectious diseases and single-pill formulations is a part of its research and development strategy, which we see as one of the strongest intangible assets supporting the company’s wide moat. Progress expanding the company’s oncology franchise could add another pillar of support.

Read more about Gilead’s moat rating.

Fair Value Estimate for Gilead Stock

Our fair value estimate is US$97 per share. We think Gilead’s HIV/HCV franchise could plateau around US$20 billion, with TAF-based combination regimens (Biktarvy, Genvoya, Descovy, and Odefsey) offsetting declines from older drugs. We also assume Biktarvy could be eligible for Medicare negotiations beginning in 2027, lowering its sales before the patent expiration. We expect sales of liver disease drugs Hepcludex and seladelpar to be as high as US$1 billion annually. In covid-19, we think Veklury could see another US$1.2 billion in sales in 2024. We assume Gilead’s HCV business will shrink from US$1.9 billion in 2021 to US$1 billion by 2027. In oncology, we include US$3 billion in sales from Yescarta and Tecartus by 2027, with annual sales stabilizing around this level as usage expands but competition gets tougher. Trodelvy sales could approach US$4 billion if approved in multiple indications by 2030. We assume a 7% cost of capital for Gilead.

Read more about Gilead’s fair value estimate.

Risk and Uncertainty

Increasing competition and pricing pressures in the HIV and hepatitis C markets are risks for Gilead. Gilead gets more than 70% of its sales from the US pharmaceutical market, giving it significant exposure to US policy changes. After the passage of the Inflation Reduction Act, we include a 2% step-down in US sales beginning in 2023 tied to Medicare inflation caps and a 2% step-down in 2025 for Medicare Part D redesign. If Gilead’s newest HIV products aren’t perceived as offering significantly improved safety or efficacy versus its older generic HIV products or Glaxo’s branded two-drug regimens, a large portion of its sales foundation could be at risk. Gilead’s HCV business has declined steeply since 2016, as competition from AbbVie allowed pharmacy benefit managers to aggressively negotiate on price. Future sales for leading oncology drug Trodelvy and other drug candidates will depend on the outcome of ongoing clinical trials.

Read more about Gilead’s risk and uncertainty.

 

Gilead Bulls Say

  • Gilead markets several single-tablet regimens for HIV, and its next-generation products with better long-term safety profiles, led by Biktarvy, are boosting its market share.
  • Guidelines that aim to improve diagnosis and treatment rates, along with new prophylaxis use, provide strong tailwinds for growth in HIV.
  • Gilead’s pipeline could begin to see more blockbuster launches, particularly if Trodelvy has solid data expanding its approved indication.

Gilead Bears Say

  • Biktarvy’s success creates a patent cliff in 2033, and it could be difficult to improve on this daily HIV drug regimen.
  • Gilead’s HCV cures shrank the population needing treatment, and competing hepatitis C regimens gave pharmacy benefit managers the ability to negotiate aggressively, whittling away the size of the company’s market.
  • Gilead’s late-stage failures in nonalcoholic steatohepatitis and immunology put pressure on recent oncology acquisitions for growth.

 

This article was compiled by Susan Dziubinski and Sylvia Hauser.
The author or authors do not own shares in any securities mentioned in this article.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Gilead Sciences Inc64.27 USD-1.21Rating

About Author

Karen Andersen, CFA

Karen Andersen, CFA  Karen Andersen, CFA, is a healthcare strategist for Morningstar.

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