Stocks Investment

An Issue Presents A Buying Opportunity For Gilead

After a rough few weeks, Gilead Sciences (GILD) is now up just 1% year-to-date. A recent piece of bad news with regards to filgotinib, which the company is developing with Galapagos NV (GLPG) isn’t going to help things. This article takes a look at the issue.

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Figure 1: Year-to-date trading of GILD. Source: YCharts.

Why filgotinib is needed

GILD makes a lot of its money from its antiviral pipeline, but constant innovation is required in that space. GILD has done that, with 15 launches in 10 years. Competition is fierce though, just look at the spike in revenues in figure 2 that dissipated with the advent of competitors like AbbVie’s (ABBV) Mavyret.

Figure 2: Antivirals for Hepatitis C (HCV) and Human Immunodeficiency Virus (HIV) are the breadwinners for GILD. Source: Q4’19 earnings presentation.

One potential avenue for GILD to reduce dependence on its antiviral pipeline was to develop in-house or in-license compounds with potential outside of the antiviral area. Oncology is one area where GILD has sought to diversify and also in inflammation. Filgotinib represents a major part of that diversification into the inflammation space. The selective JAK1 inhibitor has produced positive Phase 3 results in inflammatory conditions including rheumatoid arthritis (RA) and ulcerative colitis (UC), with trials ongoing in other inflammatory conditions.

Figure 3: Filgotinib is a pipeline in a drug for GLPG. Source: GLPG website.

On Tuesday, GLPG reported that GILD had received a Complete Response Letter (CRL) for its US New Drug Application (NDA) for filgotinib in RA. There is a safety issue regarding the benefit/risk profile of the 200 mg dose and the FDA wants data on sperm parameters from MANTA and MANTA-RAy, two studies designed to look at the effect of filgotinib on sperm parameters.

Unfortunately, MANTA and MANTA-RAy will not produce top line results until H1’21. Regarding the 200 mg dose, toxicity issues include mortality, herpes zoster, malignancy risk and clotting. Some have pointed out that the 200 mg dose is the only dose that hit the remission endpoint in the UC Phase 2/3 trial.

Theses delays only allow more time for ABBV’s JAK inhibitor, Rinvoq (upadacitinib), to grab additional market share in RA. Rinvoq launched a year ago and brought in global net revenues of $149M in Q2’20 and $86M in Q1’20.

Wrapping up

GILD needs to perform now with its other pipeline members as filgotinib now represents a delayed launch at best and has reduced potential at worst. Toxicity concerns could lead to additional black-box warnings or at least warnings and precautions on the label that might reduce some of the advantages a selective JAK1 inhibitor was supposed to have over non-selective JAK inhibitors.

If vaccines fail to address COVID, the importance of remdesivir may only be enhanced, and GILD is continuing to scale up production. I see initial data from inhaled remdesivir as a possibility in H2’20 (although it isn’t mentioned in Figure 4 below) and that could come into focus as a launch of filgotinib is now off the table. I’m upbeat about the possibility of inhaled remdesivir given COVID displays lung involvement and outpatient options for COVID are needed. As such the filgotinib issue and recent sell-off could actually present a buying opportunity for GILD.

Figure 4: In H2’20 there is Phase 3 data on tap from Axi-cel in diffuse large B-cell lymphoma, Phase 2 data from GLPG-1972 in osteoarthritis. Source: Q2’20 earnings presentation.

Any long in GILD carries several risks a few of which are mentioned here. A poor Q3’20 earnings wouldn’t help. Delays or failure of the inhaled remdesivir formulation would likely cause GILD to trade down. Further, strong vaccine data suggesting COVID-19 could die out sooner might not be bullish for GILD. In the latter case, remdesivir will still be needed and stockpiled, but perhaps the COVID premium applied to many stocks would be stripped out.

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.

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