Gilead Sciences, Inc (GILD) researches and develops pharmaceuticals sold in the United States and internationally. The company is best known for its HIV and Hepatitis C drug franchises.
I am neutral on Gilead stock. (See Analysts’ Top Stocks on TipRanks)
Exceptional Profitability and a Strong Yield
Gilead Sciences grew from just $11.2 billion in revenue in 2013 to over $27.5 billion over the trailing twelve months (TTM). The company has done this on the strength of its HIV drug franchise. Along with this growth has come profitability.
Gilead has an operating margin of 51% so far in 2021, allowing it to generate tremendous cash flows, which it passes on to shareholders as dividends and stock buybacks. Over the first nine months of 2021 alone, the company has generated $8.2 billion in cash from operations.
Over this same period, it has returned $3.2 billion to shareholders as dividends or stock repurchases. Shareholders currently enjoy a healthy 4.19% dividend yield, which is safe as the payout ratio is 48.3%. The dividend has grown for six straight years at an average of over 9% annually. This is highly encouraging for investors.
Gilead has also developed Remdesivir to treat COVID-19. This has bolstered revenues significantly in 2021, providing 20% of total product sales over the first nine months.
This drug reduces the mortality rate in adolescents and adults from the COVID-19 virus and is a great triumph for the company. As it looks like COVID-19 will continue to linger, this revenue stream should continue for some time, albeit at a reduced rate.
Patent Cliffs and Legal Challenges Are Significant Risks
All drug developers deal with patent issues. They are constantly fending off legal challenges and battling biosimilar and generic manufacturers. Gilead is no different. Many of its highly profitable HIV drugs face patent cliffs and legal challenges. Because of this, the company must continue to develop other revenue streams, like Remdesivir.
In Fiscal Year 2020, the HIV franchise of drugs provided 75% of Gilead’s total revenue. In the first nine months of 2021, this is down to 66%. This is still highly significant as it faces patent cliffs in just a few years. Another way to combat this is through acquisitions.
A drug company can make billions on a franchise and then purchase other salable drugs through acquisitions. Gilead made three such deals in 2020, bringing onboard MYR GmbH, Immunomedics, and Forty Seven. While these are steps in the right direction, the risk of revenues, and ultimately the dividend and stock price, being materially reduced in coming years is significant.
Wall Street’s Take
Wall Street analysts provide Gilead Sciences with a Moderate Buy consensus rating, based on 10 Buys and five Holds assigned in the past three months. There are no sell ratings. Analysts’ price targets range from a low of $63 to a high of $100.
The average Gilead price target of $79.77 implies 16.5% upside potential.
Verdict on Gilead
Gilead Sciences has been a cash cow for many years. The HIV franchise has served its shareholders well, and the dividend is currently safe with a very healthy yield. Furthermore, the addition of Remdesivir and acquisitions are great news for shareholders.
Still, the company is more reliant on drugs with upcoming patent cliffs than desirable, which creates serious risks to future results. Because of this, Gilead Sciences warrants a hold rating.
Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.
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