Gilead's HIV Dominance and Growing Oncology Portfolio Support a Wide Moat

Sector Strategist

Karen Andersen

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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. 

Gilead's tenofovir, or TDF, molecule—in Viread, Truvada, and older single-tablet regimens—historically formed the heart of the firm's $17 billion HIV franchise. The newest combo pills—replacing TDF with TAF—reduce bone and kidney safety issues and are seeing rapid uptake. Gilead's biggest competitive threat in HIV is GSK, which has launched two-drug regimens based on its integrase inhibitor Tivicay (Juluca in 2017 and Dovato in 2019). However, Gilead's Genvoya (2015), Odefsey (2016), Descovy (2016), and Biktarvy (2018) launches push patent protection into the 2030s and are boosting the company's market share. Novel drug lenacapavir also has potential to further extend Gilead's patent protection and serve patients in both prevention and treatment markets. 

The $11 billion Pharmasset deal brought key HCV drug Sovaldi, which established Gilead as the leader in a massive (if short-lived) market. Gilead's HCV sales peaked at more than $19 billion in 2015. However, demand has been shrinking as patients are cured, and competition from AbbVie and Merck has led to significant price discounting, and we expect Gilead's sales in this market could fall below $1 billion by 2028.

Gilead is building a pipeline outside of HIV and HCV through acquisitions. The acquisition of Kite (CAR-T therapy Yescarta) is beginning to generate significant sales growth as the drug is used in earlier-stage patients, and the 2020 acquisitions of Forty Seven (CD47 antibody magrolimab) and Immunomedics (breast cancer drug Trodelvy), as well as a collaboration with Arcus, add to the oncology pipeline. Gilead's Veklury is also a leading treatment for SARS-CoV-2; it generated $5.6 billion in sales in 2021, and although sales are declining, we think an oral antiviral in testing could have some long-term sales potential.

Business Strategy & Outlook

We assign Gilead a wide economic moat rating. 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 firm's wide moat. Progress expanding the firm's oncology franchise could also add another pillar of support. 

We think the firm does face environmental, social, and governance risks, particularly related to potential U.S. drug price-related policy reform (Gilead sees more than 70% of its sales from the U.S. pharmaceutical market) and ongoing potential for product governance issues (including litigation). While we have factored these threats into our analysis, we don't see them as material to our valuation or moat rating.

Gilead's 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 $30 billion global branded HIV market. Management has done an excellent job of maximizing sales of the TDF molecule, which is present in Viread, Truvada, Atripla, Complera, and Stribild. Gilead has now refreshed its portfolio with combination regimens containing TAF instead of TDF, which improved the kidney and bone safety profile of these chronic treatments. Genvoya set a record as the fastest HIV combination pill sales ramp, only to have that record broken by Gilead's latest regimen Biktarvy, which has the advantage of containing an integrase that does not require a booster (boosters can interact with other drug treatments and make therapy more complex). Biktarvy rapidly became the preferred regimen in 2018 and has patent protection until 2033. Gilead can also retain virtually all of the economics behind its HIV sales of its newest combination pills, rather than sharing with a partner as it does for Complera (Johnson & Johnson) and Atripla (Bristol Myers Squibb), benefiting the firm's return on invested capital. 

In HIV prevention, Gilead first gained approval of Truvada, but was able to retain a significant number of patients on branded treatment following patent expiration by switching focus to TAF-based Descovy, which still retains more than 40% of the HIV prevention market in the U.S. Gilead could also launch an every-six-month injectable, lenacapavir, as early as 2025 in HIV prevention, which we think could improve compliance and offer a more convenient way to prevent infection. Lenacapavir is also in testing as a treatment in various new combinations, which we think could extend treatment sales beyond Biktarvy. 

Gilead has also shown that it can translate its extensive understanding of the drug discovery and development process in HIV into new therapeutic areas. Despite initial criticism of the high price that Gilead paid for Pharmasset in early 2012, the $11 billion acquisition gave Gilead the most valuable hepatitis C drug in the industry and also demonstrated the firm's ability to recognize the potentially unique nature of Sovaldi's safety and efficacy profile compared with other, toxic nucleotide analogs. We think the firm's experience with another nucleotide analog, tenofovir, a key ingredient in all of Gilead's HIV combination regimens, probably contributed to its recognition of Sovaldi's value at an early stage in its development. The molecule in Sovaldi and Harvoni redefined Gilead as a powerhouse in the broader infectious disease market. Despite HCV market declines as patients are cured, Gilead and competitor AbbVie still split the global market relatively evenly. 

Gilead's oncology pipeline is also growing and advancing. The first significant boost was from the acquisition of Kite in 2017 and its CAR-T cell therapy Yescarta, and the drug has since expanded into new indications and earlier lines of lymphoma treatment, creating roughly $3 billion in annual CAR-T sales potential for Gilead. Immuno-oncology deals in 2020, including the acquisitions of Forty Seven and Immunomedics and collaboration with Arcus created potential future avenues for oncology growth. The Forty Seven acquisition added CD47 antibody magrolimab to the pipeline, which failed in MDS but could launch in AML in 2025. Immunomedics brought approved breast cancer drug Trodelvy, which is seeing expanded use in breast cancer and is in testing in lung cancer; we assume Trodelvy will generate sales of $3 billion by 2030. Arcus' TIGIT-targeting drug candidate domvanalimab is also in phase 3 testing, with data expected in 2025 that could allow Gilead to compete with earlier immuno-oncology entrants Bristol and Merck. We think smart acquisitions and the potential for future combination regimens in oncology are further diversifying the firm and strengthening its intangible assets.

Wide

Economic Moat

Gilead Sciences

Gilead Sciences, Inc. is a biopharmaceutical company, which engages in the research, development, and commercialization of medicines in areas of unmet medical need. The firm's primary areas of focus include human immunodeficiency virus, acquired immunodeficiency syndrome, liver diseases, hematology, oncology, and inflammation and respiratory diseases. It offers antiviral products under Harvoni, Genvoya, Epclusa, Truvada, Atripla, Descovy, Stribild, Viread, Odefsey, Complera/Eviplera, Sovaldi, and Vosevi brands. The company was founded by Michael L. Riordan on June 22, 1987 and is headquartered in Foster City, CA.

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