- I believe Epclusa that the new HCV drug will boost Gilead's revenues and earnings in the coming quarters.
- Considering its compelling valuation metrics Gilead stock, in my opinion, is undervalued.
- The average target price of the top analysts is at $107.50, an upside of 30.6% from its June 28 close price, which appears reasonable.
On June 28, Gilead Sciences (NASDAQ:GILD) announced that the U.S. Food and Drug Administration had approved Epclusa the first all-oral, pan-genotypic, single tablet regimen for the treatment of adults with genotype 1-6 chronic hepatitis C virus infection. Epclusa is also the first single tablet regimen approved for the treatment of patients with HCV genotype 2 and 3, without the need for ribavirin.
The approval of Gilead's new HCV drug can give Gilead a significant advantage over its competitors' HCV drugs Viekira of AbbVie (NYSE:ABBV), and Zepatier of Merck (NYSE:MRK). In contrast to Viekira Pak which is approved for use in genotype 1 patients and Zepatier which is approved for use in patients with genotypes 1 and 4, Epclusa is approved for use in patients with any hepatitis C genotype. Although Gilead's price of $74,500 for 12 weeks of Epclusa is lower than Gilead's Sovaldi list price, the company would not have to give the big discount it has offered for Sovaldi and Harvoni to maintain market share.
As a result, GILD's shares surged 5.19% on the day of the announcement and other 0.81% in after-hours trading.
To calculate the advantage of the new drug for Gilead, I have looked for information about genotype prevalence estimates. According to a comprehensive study by National Center for Biotechnology Information, HCV genotype 1 is the most prevalent worldwide, comprising 83.4 million cases (46.2% of all HCV cases), approximately one-third of which are in East Asia. Genotype 3 is the next most prevalent globally (54.3 million, 30.1%); genotypes 2, 4, and 6 are responsible for a total 22.8% of all cases; genotype 5 comprises the remaining less than 1%. While genotypes 1 and 3 dominate in most countries irrespective of economic status, the largest proportions of genotypes 4 and 5 are in lower-income countries. Since AbbVie's HCV drug Viekira Pak is approved for use only in genotype 1 patients, it can serve less of half HCV patients. Also, Merck‘s drug Zepatier is not an answer for the 54.3 million infected with genotype 3 HCV virus.
As I see it, this development is very important for Gilead since due to the competition from AbbVie and Merck it had to offer a substantial discount to insurers despite having a better product. As a result, Gilead’s hepatitis C drugs Harvoni and Sovaldi sales fell to $4,294 million in the first quarter of 2016 from $4,892 million in the prior quarter and $4,551 million in the first quarter of 2015.
Despite the drop in HCV drugs sales in the recent quarter the company had maintained 90.2% market share, compared to 8.7% market share for AbbVie's drug and only 1.1% for the most recent competitor Merck's HCV drug. That, in my opinion, proves that the decline in Gilead’s HCV revenue was mostly due to the deep discount it had to offer to maintain its high market share. AbbVie's Viekira Pak is a multi-drug-per-day therapy often requiring use with ribavirin, a prior-generation drug with a long list of side effects. Moreover, last fall, the FDA required a new label warning of potential liver damage in patients with decompensated livers. While Merck's Zepatier cure rates are very good, achieving a cure in patients with specific polymorphisms requires dosing that can last as long as 16 weeks, compared to 12 weeks or less for Gilead's HCV drugs.
Gilead stock has fallen sharply since it reported disappointing results for its first quarter of 2016 which missed EPS expectations. Since the beginning of the year, GILD's stock is down 18.7% while the S&P 500 Index has declined by 0.4%, and the Nasdaq Composite Index has lost 6.3%. However, since the beginning of 2012, GILD's stock has gained an astounding 309%. In this period, the S&P 500 Index has increased 61.9%, and the Nasdaq Composite Index has risen 80.1%. According to TipRanks, the average target price of the top analysts is at $107.50, an upside of 30.6% from its June 28 close price, which appears reasonable, in my opinion.
Gilead Stock Daily Price Chart
Chart: TradeStation Group, Inc.
Considering its compelling valuation metrics, GILD's stock, in my opinion, is undervalued. Gilead's trailing P/E is very low at 7.03, and its forward P/E is even lower at 6.67. The price to free cash flow ratio is very low at 6.89, and the Enterprise Value/EBITDA ratio is also very low at 5.15, the second lowest among all 56 S&P 500 Healthcare companies.
The 10 S&P 500 Healthcare stocks with the lowest EV/EBITDA ratio
All in all, I believe that the new drug will boost Gilead's HCV drugs revenues and earnings in the coming quarters after that its HCV products sales declined 12.2% in the last quarter from the previous quarter and 5.6% year-over-year. Also, GILD's stock which is down 30% from its 52-week high of $118.14 due to declining HCV drugs sales should recover. The average target price of the top analysts is at $107.50, an upside of 30.6% from its June 28 close price, which appears reasonable, in my opinion.