A few months ago I wrote a long article about Gilead that I wanted to title “Gilead: Buy Hepatitis C, Get AIDS for free”. Today I want to flip that title backwards and call it “Gilead, Buy HIV, Get Hepatitis C for Free.”
We spent a lot of time this quarter talking to our colleagues in the investment industry, soliciting “the other side” argument for Gilead, trying to understand what we are missing about this stock. As we suspected most people cannot overcome the confluence of two business models inside one company: Gilead’s growing, annuity-like HIV business and the shrinking and ultimately finite Hep C business.
Let’s look at the HIV business first. It is a stable business that is growing about 6-8% a year in the developed markets: unfortunately, 4% more people get infected with HIV every year, and prices go up 2-4% a year. This business has substantial operational leverage (costs don’t grow as fast as revenues), thus 6-8% revenue growth should bring 8-10% earnings growth. Twenty years ago, AIDS was a death sentence; today it is an inconvenience. A person infected with AIDS today has a similar lifespan as a healthy person, but unfortunately for them (fortunately for GILD’s investors) they have to keep taking GILD’s medicine for the rest of their lives.
Gilead has several HIV drugs, which fall into one of two groups: TDF (tenofovir disoproxil fumarate)-based and TAF (tenofovir alafenamide)-based. Patents for TDF-based drugs expire over the next couple years; however, GILD recently came out with TAF drugs. They are as effective as TDF drugs but have a fraction of the toxicity – there are fewer signs of kidney injury and decreases in bone density. The market is slightly skittish about GILD’s ability to transition patients from TDF drugs to TAF drugs – we are not concerned.