Company Reports

We’re maintaining our $97 fair value estimate for Gilead Sciences following first-quarter product sales growth of 5%, in line with our expectations. We think the progress of new long-acting HIV treatments to phase 3 trials is encouraging, and we expect lenacapavir’s data coming later this year in HIV prevention could help expand the eligible US market and secure access for patients outside the US. We think Gilead’s liver disease portfolio is well positioned to generate growth going forward, as it saw 9% growth in the quarter thanks to stabilizing hepatitis C treatment demand, and Gilead’s recent CymaBay acquisition appears to be a perfect fit. However, competition is weighing on the firm’s more rapidly growing oncology products like Trodelvy (breast and bladder cancers) and lymphoma cell therapy Yescarta. We think Gilead needs positive data from upcoming multiple myeloma and lung cancer studies to retain strong oncology growth and push overall sales growth into durable mid-single-digit territory. Overall, the stability of the HIV and liver disease businesses and the growth potential in oncology support the firm’s wide moat.

Gilead is acquiring CymaBay and its oral PPAR-delta agonist seladelpar for $4.3 billion in an effort to expand its liver disease portfolio. We think this is a good complement to Gilead’s existing hepatitis C portfolio of drugs, and we’re not making any changes to our $97 Gilead fair value estimate. Overall, we think HIV and oncology sales remain the biggest supports for Gilead’s wide moat.

We’re maintaining our $97 fair value estimate for Gilead following fourth-quarter results and 2024 guidance that was relatively in line with our expectations. Gilead’s operating cost discipline heading into 2024 appears slightly better than our expectations, although we have also removed oral COVID-19 antiviral obeldesivir from our model following failure in a second phase 3 trial, so there was no net impact to our valuation. Gilead’s product sales were flat again in 2023 due to significant declines in demand for COVID-19 antiviral Veklury, similar to 2022 dynamics; excluding Veklury, the firm saw 2023 product sales growth of 7% driven by HIV (6% growth) and oncology (37% growth). Overall, the stability of the HIV business and growth potential in oncology both support the firm’s wide moat.

One of Gilead’s key cancer drugs failed to extend survival in a study that could have expanded its approval into the large lung cancer market, but we’re maintaining our $97 fair value estimate for the firm. We still include potential lung cancer sales for Trodelvy in our valuation model, but we’ve pushed back the start of this potential revenue from 2025 to 2027, given this setback. We continue to see Trodelvy generating $3.5 billion in annual sales by 2032, with roughly 20% of this revenue coming from lung cancer indications. The drug is already seeing strong growth in triple-negative breast cancer as well as hormone receptor-positive and HER2-negative breast cancer, and we expect these indications to dominate the drug’s long-term sales. Overall, we see Trodelvy as one piece of Gilead’s expanding oncology portfolio, which together with the established and dominant HIV portfolio forms the basis of its wide economic moat.

Gilead’s third-quarter results were stronger than we had anticipated, almost entirely due to higher than expected COVID-19 hospitalizations and resulting sales of COVID-19 treatment Veklury ($636 million). Veklury helped Gilead maintain flat total product sales at $7 billion in the quarter relative to the third quarter of 2022. We’re not making any changes to our $97 fair value estimate, as we’re maintaining our projections for Gilead’s core businesses in HIV and oncology. We continue to see Gilead’s long-term strategy for HIV growth (centered around new injectable products for treatment and prevention) as well as strong prospects for oncology growth supporting a wide moat. We think investors underappreciate the stability of the firm’s HIV foundation and the growth potential of the firm’s oncology portfolio and pipeline.

Gilead Sciences generates stellar profit margins with its HIV and hepatitis C virus, or HCV, portfolio, which requires only a small salesforce and inexpensive manufacturing. We think its portfolio and pipeline support a wide moat, but Gilead needs HCV market stabilization, strong continued innovation in HIV, solid pipeline data, and smart future acquisitions to return to growth.

We're maintaining our $97 fair value estimate for Gilead following a strong second quarter that displayed both the firm's continued ability to gain share in the HIV market with Biktarvy as well as potential to grow the relatively new oncology business into a key pillar of its wide moat. Gilead's strength in oncology and HIV drove 5% revenue growth in the second quarter (11% product sales growth excluding COVID-19 drug Veklury). Gilead slightly raised its product sales guidance to $26.3-$26.7 billion, despite lowering Veklury guidance to $1.7 billion, which implies a solid 6.5%-8% growth of the base business. Our own forecast is at the high end of this range, and we continue to see shares as undervalued, as the market fails to give Gilead credit for its long-term potential in HIV (lenacapavir in treatment and prevention) and oncology (further expansion of its portfolio into lung cancer and immuno-oncology).

We’re maintaining our $97 Gilead fair value estimate following first-quarter results that were in line with our estimates. Overall product sales growth of 15% excluding COVID-19-related sales were driven by solid HIV performance (13% growth) and strong launches in oncology (59% growth). We saw slightly higher international sales for CAR T-cell therapy drug Yescarta in lymphoma than we had modeled, as Yescarta appears to be seeing expanded use and strong reimbursement in many global markets. Strong sales of Descovy (20% growth) essentially reflected U.S. market growth in HIV prevention, and Biktarvy’s 24% growth reflects continued share gains in an HIV treatment market growing at a single-digit rate. Research and development costs were higher than we had anticipated as the firm is now wrapped up in 22 phase 3 clinical trials. Beyond COVID-19-related headwinds as sales of antiviral drug Veklury sink in 2023, we think Gilead can return to low-single-digit top-line growth in 2024 and hold non-GAAP operating margins above 40% in the long run. We expect the firm’s solid foundation in HIV treatment and prevention and expanding sales in oncology to continue to support a wide moat, and we think shares remain slightly undervalued, with the market not fully appreciating long-term potential in oncology. We see significant growth drivers in both HIV and oncology that will continue to combat headwinds from declining hepatitis C sales.

While Gilead’s 2022 bottom-line results were in line with our estimates, several drugs outperformed our sales expectations, and Gilead’s guidance and progress with its pipeline give us more confidence in the firm’s ability to sustain growth going forward (excluding volatility in demand for COVID-19 antivirals). We’re substantially raising our fair value estimate to $97 from $77, as we have boosted our long-term sales forecast for HIV drug Biktarvy after another quarter of outperformance, factored in long-term growth for cell therapy Yescarta as it works its way into earlier lines of treatment in more types of blood cancer, and also added Gilead’s oral COVID-19 antiviral, GS-5245, to our model, as it recently entered phase 3. We think that COVID-19 antiviral sales are likely to dip in 2023 but that the market could be more maintainable than we had anticipated. Despite faster growth in research and development expenses expected in 2023, we also now assume steadier spending as a percentage of sales in the long term. Partly countering these changes, we have slightly lowered our sales estimates for cancer drug Trodelvy. Despite Trodelvy's strong growth in triple negative breast cancer and the approval in HR-positive/HER2-negative breast cancer, as we think the competitive landscape in this indication will be challenging, given strong data in the HER2-low population for AstraZeneca and Daiichi Sankyo’s Enhertu. Overall, we think Gilead’s infectious disease and oncology franchises support a wide moat, and we think shares look slightly undervalued.

Gilead Sciences generates stellar profit margins with its HIV and HCV portfolio, which requires only a small salesforce and inexpensive manufacturing. We think its portfolio and pipeline support a wide moat, but Gilead needs HCV market stabilization, strong continued innovation in HIV, solid pipeline data, and smart future acquisitions to return to growth.

We’re maintaining our $77 fair value estimate for Gilead Sciences following strong third-quarter results that displayed the strength of the company's dominant HIV regimen Biktarvy as well as oncology therapies Yescarta and Trodelvy. Sales in the quarter were well ahead of our expectations, mostly due to continuing strong sales of COVID-19 drug Veklury (well below peak sales but still $925 million), but also due to Biktarvy’s solid U.S. sales (nearly $2.3 billion in the quarter). While we’ve slightly raised our near-term Veklury outlook and long-term Biktarvy sales forecast, this wasn’t significant enough to alter our valuation. That said, we think the quarter's strong performance shows the potential for Gilead’s oncology franchise to grow and diversify, supporting the firm’s already established wide moat in infectious diseases.

After taking a closer look at what we consider the three key elements of the Inflation Reduction Act that will affect the biopharma industry over the next decade, we're reducing our fair value estimates for 17 of the biggest biopharma names in Morningstar's coverage by an average of 2%. We think the step-down in U.S. branded drug sales from capping Medicare price increases to inflation (fully rolled out in 2023), redesigning Medicare Part D (beginning in 2025), and Medicare negotiation (beginning in 2026 for small molecules) will result in a 3% reduction in total sales for these firms by 2031, with firm-level reductions depending on the firm's reliance on the U.S. market, proportion of the portfolio targeting seniors, history of price increases, and relative size of its small molecule and biologics portfolios (as biologics are immune from Medicare negotiation for 13 years instead of nine). Our estimates factor in some ability for the industry to either benefit from certain changes (like potential increased prescription fill rates in Part D with lower out-of-pocket costs) or compensate for headwinds (like responding to inflation caps on price increases with higher launch prices). Overall, we think the effect of the Inflation Reduction Act is manageable for the industry, and we see the competitive advantages and economic moats of these firms remaining intact.

Gilead Sciences generates stellar profit margins with its HIV and HCV portfolio, which requires only a small salesforce and inexpensive manufacturing. We think its portfolio and pipeline support a wide moat, but Gilead needs HCV market stabilization, strong continued innovation in HIV, solid pipeline data, and smart future acquisitions to return to growth.

Gilead Sciences produced strong second-quarter results despite lower demand for COVID-19 drug Veklury in the quarter due to lower hospitalization rates. Management increased product sales guidance for 2022 by $700 million to $24.5 billion-$25 billion on strong HIV and oncology sales as well as higher expected demand for Veklury (partly due to depleted U.S. inventories) for the remainder of the year. We're maintaining our $81 fair value estimate and think the market underappreciates Gilead's potential to extend HIV revenue and expand its oncology franchise in the long run. The firm's HIV, hepatitis, and oncology products and pipeline support a wide moat.

The likelihood of drug-pricing policy changes in the United States changed dramatically over the course of July, and we are now assessing the impact of the various measures included in the Inflation Reduction Act of 2022 in our Big Biopharma valuation models. Assuming the bill is eligible to pass via reconciliation (the Senate parliamentarian is reviewing the bill), we think Democrats will be able to pass the Senate bill, paving the way for it to be signed into law. Overall, we don’t expect major changes to our fair value estimates or moat ratings, as the changes net out to a moderate negative that we believe is manageable, likely through a combination of cost-cutting, agreements with generic firms for limited authorized generic launches (to avoid the list for negotiated drugs), and higher launch prices (to counter pressure on price increases and earlier declines due to negotiation).

Morningstar now directly incorporates cost-effectiveness analysis into our biopharmaceutical ratings through what we're calling our capsule system. Given the lack of regulatory oversight on whether U.S. drug launch prices or price increases are justified, an independent, private organization—the Institute for Clinical and Economic Review, or ICER—has gained prominence and authority assessing cost-effectiveness. Drugs that are priced above ICER's cost-effectiveness thresholds or that record high unsupported price increases contribute to Morningstar's ESG Risk Rating Assessment and equity research methodology for incorporating environmental, social, and governance risk into our fair value estimates and moat and uncertainty ratings.

We believe the Big Biopharma industry offers protections against mounting macro headwinds, and we don't expect any major changes to our fair value estimates based on macro pressures. The stock market is down close to 20% from its peak on fears of inflation, recession, and the war in Ukraine (along with elevated valuation multiples), but Big Biopharma stocks offer strong protection against these challenging macro headwinds. Additionally, as these headwinds increase, major U.S. drug policy reform is growing more unlikely, removing a key risk to the industry. On inflation, we don't expect as big of an affect on the Big Biopharma group as on most industries, as the cost of goods sold typically represents less than 5% of revenue for key blockbuster drugs. Any inflation in the active pharmaceutical ingredient market should not significantly affect margins. Also, Big Biopharma firms see less than 1% of sales from Ukraine and Russia, making the war less impactful. On a potential recession, prescription drug demand is highly inelastic, which lends stability regardless of potential recessionary pressures. Big Pharma sales were largely unaffected in the last recession. Inflation and recessionary concerns appear to have largely removed the potential for U.S. drug policy reform, eliminating a key uncertainty hanging over the group.

We're not making any changes to our $81 fair value estimate for Gilead Sciences following steady results in the first quarter, as we think the firm is still on track to meet management's reaffirmed top- and bottom-line non-GAAP guidance. Gilead's total product sales grew 3% in the first quarter, with 5% growth in sales of COVID-19 antiviral Veklury and 2% growth for the remaining portfolio. Biktarvy's 18% growth led performance in the HIV portfolio, and Gilead is now annualizing pressure from generic Truvada in the United States, which should allow continued single-digit HIV sales growth for 2022. We assume Veklury sales fall substantially for the remainder of the year, however, factoring in lower hospitalizations and more oral and injectable treatment options. Hepatitis C price-related declines continued, but oncology growth is ramping up and beginning to have more of a positive effect on overall sales. Trodelvy ($146 million in sales) and cell therapies Tecartus and Yescarta ($274 million) are growing strongly as they move into earlier lines of treatment. We think Gilead's dominance in virology and growing portfolio in oncology continue to support a wide moat.

We don’t expect the Big Biopharma industry will be significantly affected by the war in Ukraine. With most large pharmaceutical and biotechnology firms generating less than 1% of sales from Ukraine and Russia, we don’t expect the conflict will materially affect valuations or moats in the industry. Additionally, we expect sanctions will be less impactful for drugs, as critical-care medical products are less likely to be limited by sanctions. While not all biopharma firms have provided context on the impact of the war in Ukraine, the ones that have provided insights have largely expressed little impact to their overall businesses. Johnson & Johnson, Eli Lilly, Merck, and AbbVie have stated that sales in Russia and Ukraine represent less than 1% of total sales.

Gilead reported top-line data from a key phase 3 study of cancer drug Trodelvy in patients with a common form of breast cancer (HR+/HER2-, which accounts for 70% of breast cancer cases) that appears mixed, but we're not making any changes to our probability-adjusted estimates for future Trodelvy sales. The drug led to a statistically significant improvement in progression-free survival as compared with chemotherapy. However, Gilead was hesitant to declare the results clinically significant, so uncertainty remains around the magnitude of the benefit and the receptivity of the Food and Drug Administration to a filing based on this data. In addition, there was only a trend toward an improvement in overall survival at this first interim analysis, which means that Gilead may have to wait to see if this improvement becomes significant at a second interim analysis, or at a final analysis in 2024. Gilead had previously guided to filing in this indication in the second half of 2022. We think it's likely that the improvement in PFS is at the low end of the 1.5-2-month benefit that the trial was designed to be able to detect, although the trial tested later-stage patients and results may be difficult to extrapolate to earlier-stage patients. We still assume a 60% probability of launch in this indication in 2023 and potential sales in HR+/HER2- breast cancer of roughly $2 billion, if approved, by 2031 (overall, we assume potential for more than $7 billion in total Trodelvy sales by 2031, with $4.8 billion included in our valuation). While the TROPiCS-02 study seeks to extend Trodelvy's use beyond approved indications in triple-negative breast cancer and bladder cancer, Gilead is also working to expand approval to earlier lines of therapy (first-line triple negative breast cancer) and other solid tumors (lung cancer) with multiple phase 3 studies starting in 2022. We think Gilead's dominance in virology and growing portfolio in oncology continue to support a wide moat.