Gilead Sciences Redux: Why I'm Once Again Targeting This Big Pharma
As the stock moves out of a long-established range, I've got more than a few reasons for a new trade.
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Just over a decade ago, Gilead Sciences GILD committed the cardinal sin within the pharmaceutical industry. Something that Pfizer PFE hasn’t done in its over 150 years of existence.
What was it that Gilead did? It came up with a complete cure for a widespread disease.
Technically, Gilead purchased the company that was developing the cure for hepatitis C. This brought in a huge influx of revenues for a few years. But as the diseased population was cured and with the entrant of two other competitors into the market, sales fell to a trickle. Overall sales growth turned negative for many years, and the stock was moribund, and range bound. I highlighted what turned out to be an easy and successful covered call trade on Gilead during this range bound era in the spring of 2024. Fortunately for Gilead’s shareholders, the stock has finally moved out of a long-established range in recent quarters.
Gilead’s bread and butter for as long as I can remember is its HIV franchise, a classic chronic disease where the company has been the market leader in treatment since just after the turn of the century. Every few years or so, Gilead brings improved versions of its franchise to the market.
The stock took a bit of a hit this past week after it was reported that pharmacy benefit manager Caremark would not currently incorporate the latest version of Gilead’s HIV effort, HIV PrEP therapy Yeztugo, into its health plans for now. I expect this issue to be resolved in the coming quarters. The drop in the shares does provide a better entry point, and I can get a potentially lower average price by using covered call orders.
Biktarvy, currently the company’s best-selling HIV treatment, saw sales rise 13% to $13.4 billion in 2024. In addition to HIV, its treatment for liver diseases brought in $3 billion in revenues in 2024, up 9% from the prior year.
Gilead has also branched out to other treatment areas in recent years. Its purchase of Kite Pharma in 2017 brought its eventually approved B-cell lymphoma therapy Yescarta, which did $1.6 billion in sales in 2024. This acquisition also landed its second-line (2L) metastatic triple-negative breast cancer (mTNBC) treatment Trodelvy. This product saw revenues rise 24% in 2024 to $1.3 billion. It is likely to be approved as a first-line treatment for this indication in 2026.
Last year, Gilead received FDA approval for its first inflammatory disease treatment. That was for its primary biliary cholangitis therapy Livdelzi. Initial sales traction has been solid, and the drug brought in $78 million in sales in Q2, up 95% sequentially from the prior quarter. Gilead also has a diverse pipeline.
The company is putting its cash flow to work, paying down $1.8 billion in debt and executing $1.3 billion in stock repurchases in the first half of this year. It should see earnings growth in the high single digits over the next few years on sales growth in the mid-single digits.
In this overbought market, the stock seems more than reasonably valued at 14 times trailing earnings with a dividend yield of just under 2.8%. I have no problem holding Gilead over the longer term but would like a lower entry point or a decent trade return from going with the covered call route.
Option Strategy
Here is how one can initiate a position in GILD utilizing a covered call strategy. As a reminder, covered-call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Selecting the March $115 call strikes, fashion a covered call order with a net debit in the $105.00 to $105.40 a share range (net stock price - option premium). Liquidity is quite solid with the options against this equity.
This strategy provides downside protection of 10% over the trade’s duration, which includes three quarterly dividend payouts of 79 cents a share. It also provides return potential of 12%, including dividends, even if the stock trades flat over its option duration.
At the time of publication, Jensen was long GILD and PFE.
