The Case for Gilead if Remdesivir is Effective
Summary
COVID-19 poses a severe public health emergency for humanity. We envisage investment into therapeutics like remdesivir by governments, will be cost-effective and save lives, should remdesivir prove to be efficacious. If approved, we believe remdesivir will be transformative for Gilead, not only in the near term, but on a longer horizon. In line with the WHO R&D Blueprint report, we consider remdesivir as the most promising therapeutic option currently and believe there is a greater than 50% chance the drug will be approved, leading to significant upside. Our model is conservative, accounting for estimated revenues from government stockpiling only, based on historical precedents seen in the most recent influenza pandemic. Upon remdesivir approval, we believe Gilead stock could reasonably see an increase of between 20–70% from current levels.
Introduction
With the spread of the SARS-Cov-2 virus (the pathogen that causes the disease named COVID-19) across the globe and reports of local transmission on more than 4 continents as of this writing (North America, Europe, Australia and Asia), we have entered the pandemic. It is our thesis that the need for therapeutics like remdesivir will become increasingly more urgent, especially in the short to medium-term, as the clinical manifestation of SARS-Cov-2 virus, in a significant proportion of those infected, is a severe disease. Coupled with a relatively high fatality rate, the pressure this will put on clinical resources will be significant, and may push healthcare systems to breaking point. The earliest possible deployment of a vaccine is over 12 months away at best, further highlighting the critical need for a therapeutic. Should remdesivir prove to be effective, we envisage that these factors, will drive significant demand for the drug in the short, medium and long-term. Hence, we see substantial potential upside in Gilead.
1. Vaccine vs therapeutic
It is important to appreciate the difference between a vaccine and therapeutic, as this distinction is critical for understanding the potential role remdesivir can play in this SARS-Cov-2 outbreak. It is evident that some investors and analysts do not understand the difference between a vaccine and therapeutic; Donald Trump did not appreciate the difference until a recent meeting with pharma execs. In our view, this provides a significant investment opportunity for well-informed investors.
In the context of infectious diseases, a vaccine is intended for use on uninfected people in order to prevent infection in the future, by teaching the immune system how to recognise the virus and neutralize it before it can cause disease. This is known as “immunity”; the purpose of vaccines is to generate immunity against the virus and prevent people becoming infected. A vaccine will not be used on infected people, as they already have the virus.
On the other hand, a therapeutic is for use on infected people in order to treat/cure them from the virus that is making them sick. A therapeutic does not generate immunity to a virus (although, it may help slow the virus down such that the body can eventually generate its own immunity). This fundamental difference between vaccines and therapeutics underlies the different value propositions of each; a therapeutic can be used to treat COVID-19 here, now and in the future, whereas a vaccine is for generating immunity to the virus for the future. Remdesivir is a therapeutic.
As the outbreak continues to disseminate and the severity of clinical disease becomes more apparent, the need of an effective therapeutic grows proportionally. Given that remdesivir demonstrated a favourable safety profile (here and here) during the 2018–2019 Ebola outbreak, we believe that rapid regulatory approval can be achieved, even if only mild to moderate clinical benefit is seen in COVID-19, as this will translate into massive overall cost-effectiveness for healthcare systems and save lives.
Furthermore, although vaccines are one of the most important interventions ever developed by modern medicine, vaccine efficacy in not always 100%. In other words, it is not guaranteed that a vaccine will provide complete immunity to a pathogen. This indicates that, should a vaccine be deployed in 12 months, remdesivir can likely continue to have long-term use. We witnessed this scenario unfold with the anti-flu therapeutic, oseltamivir (Brand name: Tamiflu), even though we have relatively effective flu vaccines. In 2017, oseltamivir fetched Roche $536.99 million in global revenues — this for a virus that is less infectious and less fatal than SARS-Cov-2 (interestingly, oseltamivir was originally developed by Gilead and subsequently licensed to Roche). Coupled with an ever-increasing anti-vaccine sentiment amongst ill-informed members of the public, we anticipate less than optimal vaccine uptake rates, which will compromise herd immunity and facilitate virus dissemination. We are of the view that SARS-Cov-2 will become an established human pathogen for the foreseeable future (see below).
2. R0
The basic reproductive number (R0) of a contagious pathogen is the number of people expected to be infected by an individual who is already infected. In other words, R0 is a measure of how transmissible a pathogen is. The estimated R0 of SARS-Cov-2 was 2.68 at the beginning of the outbreak (similar R0 estimated here). Other estimates put the R0 between 4.7 and 6.6 (note: as of 11th March 2020, this study has not yet been peer-reviewed). For perspective, the R0 of seasonal and pandemic flu is below 2. This provides a forecast as to how many people will become infected in the absence of effective countermeasures. Assuming the R0 for SARS-Cov-2 is between 2–3, this would mean 50–60% of the population should eventually become infected in the absence of effective containment, as this pathogen is novel and there is likely to be limited pre-existing protective immunity in the population. Hence, it is our view that SARS-Cov-2 will likely infect the majority if the world’s population in the coming months, if draconian Hubei-style containment in multiple countries is not deployed. Until the R0 falls below 1.0, the virus will continue to spread.
Due to the exponential propagation of this virus, every day that draconian containment measures are not implemented, makes it increasingly more likely that any subsequent containment measures will be ineffective and that delay/mitigation strategies will be needed instead. The Chinese authorities understood this very well, which explains the extent of their lock-down. Hence, it is our view that upside for Gilead grows proportionally with the inability to contain it; GILD’s price should climb every day that containment is not achieved.
3. Disease severity (this is not the flu)
The disease caused by SARS-Cov-2 virus is COVID-19. A recent medical article outlines the characteristics of this. For the purpose of our argument, should remdesivir be approved, we assume it will be reserved for severe cases only (ongoing Phase 3 trials in China are evaluating it in severe as well as mild to moderate disease, which could theoretically increase potential market size). The frequency of severe disease in this study was 15.7%, which was defined according to American Thoracic Society Guidelines for community-acquired pneumonia (the China CDC puts the rate of severe cases at 14%). Intriguingly, of those with severe disease, 73% were younger than 65 years of age. Importantly, 38.7% of severe cases (6.1% of all cases) required some form of mechanical ventilation, either invasive or non-invasive (as a side note, 35.8% of cases were given oseltamivir, which highlights just how physicians are trying anything they can to treat their patients). This is a critical point, because healthcare systems have limited numbers of ventilators and intensive care units (ICUs) that can be easily overwhelmed if caseloads are too high. If hospitals become overwhelmed, the effects will spill over onto patients with other healthcare issues such as injuries, unrelated infections, cardiovascular disease (strokes, heart attacks), cancer, etc. Hence, an effective therapeutic to treat COVID-19, would be extremely useful and valuable, if it can ameliorate disease severity and reduce pressures on hospitals.
An important point to consider about remdesivir is that it is administered intravenously (IV). Hence, remdesivir can only be given under medical supervision, in hospitals or other healthcare facilities. We do not see this as a barrier to use, as the clinical severity of COVID-19 will force strategies to enable the drug to be given in non-traditional settings, should the need arise. Should remdesivir prove to be effective, it is our view that the political fallout of failing to treat severe cases (most of which are <65 years old) with an effective medicine, will provide significant impetus for governments to stockpile and administer the drug using improvised healthcare facilities.
4. Case fatality rate vs “closed” case fatality rate
It is our view that the clinical course of COVID-19 is serious. It is certainly more lethal than seasonal flu and the Swine flu pandemic of 2009. This stems from the disease severity and hospital pressures (covered above), as well as epidemiological measures of mortality.
The main measure of mortality that is quoted by most media outlets is the case fatality rate: defined as number of deaths divided by number of cases. While this provides an estimate of mortality, it likely inaccurately estimates the true fatality rate as the outbreak progresses. On the other hand, another mortality measure is the “ closed” case fatality rate, defined as the number of deaths divided by the number of cases with a clinical outcome (i.e. deaths/(recoveries + deaths)). This provides a measure of death in confirmed cases, as they progress to the final outcome of their illness. For example, during the 2003 SARS coronavirus outbreak, the initial case fatality rate was estimated to be about 4%, but ended up being 9.6% once the outbreak was over and all known cases had progressed to their clinical outcome. We expect the mortality rates of the current outbreak of SARS-Cov-2 to likely follow a similar trajectory in the absence of effective countermeasures. Other estimates of the case fatality rate lie at about 1% (here and here), when adjusting for the number of estimated unconfirmed cases. In our view, even this case fatality rate is worryingly high, given that it is 10x higher than that of seasonal flu. Regardless of which measure of mortality is taken, it is becoming increasingly clear that SARS-Cov-2 is going to result in a significant number of deaths globally, in the absence of effective countermeasures.
As can be seen here, the “closed” case fatality rate currently stands at over 5%, which is high for a pandemic virus. It is expected that this rate will continue to change (hopefully decrease) as the outbreak progresses and more countries fold into the pandemic. Indeed, countries with weaker healthcare systems will experience higher fatality rates (but of course, many of these cases will go unreported/unconfirmed). It is our view that governments understand this well and will need to employ countermeasures to mitigate the number of deaths. This further underscores the urgent need for an effective therapeutic, in the short to medium term, and governments will face enormous public pressure to provide such an intervention for their people.
5. Lack of draconian lockdown outside of China; a catch 22 for the economy
The lock-down of Wuhan was initiated when there were about 600 confirmed cases on 22–23 January 2020. As of 11th March 2020, the number of confirmed cases in the US, Spain, Germany and France exceeded 600 each. On 8th March 2020, Italy moved to initiate the types of containment measures that may have a realistic chance of slowing down the virus. We expect the number of cases outside of China to continue to grow exponentially in the absence of draconian lock-down. It is our view that many countries will be unable/unwilling to implement draconian lock-down in the near term, due to potential economic effects and lack of totalitarian government control in these territories. Hence, delay and mitigation strategies will likely form the mainstay of governments’ plans, even though China’s lock-down has begun to deliver decreasing new case numbers. It is our view that as the number of cases grows exponentially outside China, minor delays in implementing draconian lock-down will have magnified consequences for the economy. Furthermore, even if some countries can subsequently achieve containment in the near term, they are at risk of further outbreaks from “re-imported” cases in the future, from territories where lock-down has not been established. Thus, we envisage that any effective lock-down will need to be enforced on the order of months, which will have far-reaching effects for the economy. This “catch 22” for the economy, further highlights the need for an effective therapeutic, until a vaccine can be widely deployed.
6. Other potential therapeutics
Regeneron (REGN) is hurrying to develop monoclonal antibody therapeutics for COVID-19, in an effort to emulate the success it achieved with Ebola. However, as remdesivir is already in phase 3 trials, that will read out in a few weeks, means Gilead has a significant head start. Furthermore, remdesivir is a small molecule drug, meaning it can be mass produced and deployed relatively quickly and inexpensively, compared to the biologic monoclonal antibodies that Regeneron is developing. While a monoclonal antibody approach may work well for small-scale outbreaks, like we saw with Ebola, the supply of such drugs may struggle to fulfil demand, if we have hundreds of thousands or millions of cases, due to their relatively slower manufacturing processes. Furthermore, small molecule drugs are generally more chemically stable than biologics and can thus be stockpiled more easily than biologics, which may need refrigeration. We envisage that monoclonal antibody therapeutics will be able to take market share from remdesivir if they can display superiority in head-to-head clinical trials. Otherwise, remdesivir (or other small molecule(s)) will be standard of care if approved.
A comprehensive list of potential small molecule drugs for COVID-19 can be found here. In our view, a realistic near-term competitor therapeutic to remdesivir is the combination of lopinavir and ritonavir, two HIV small molecule drugs. However, a preclinical study (funded by Gilead) in the context of MERS, which is caused by MERS-Cov (another coronavirus related to SARS-Cov-2), demonstrated that remdesivir was superior to the combination of lopinavir and ritonavir. Hence, we have more conviction in the efficacy of remdesivir vs combination lopinavir-ritonavir for the treatment of COVID-19.
Another promising small molecule therapeutic for COVID-19 is the generic drug chloroquine, which is a cheap and widely available antimalarial. This drug demonstrated in vitro activity against the SARS-Cov-2 virus, but was less effective than remdesivir in vitro (in vitro means in “test-tube” experiments). Nevertheless, there are reports that chloroquine may be demonstrating utility in patients, however, as the authors state: “it should be considered carefully before drawing definitive conclusions, since no data has been provided yet to support this announcement. Results were produced in ten different hospitals and possibly from a number of different clinical protocols among those listed above, which include various designs for control groups (none, different antivirals, placebo, etc.) and various outcome primary indicators. The final interpretation is therefore technically demanding, and in the absence of published data, it is difficult to reach any firm conclusion”. We believe that if chloroquine is indeed effective, remdesivir would need to demonstrate enhanced benefit to justify its use and cost over chloroquine. Hence, investors unable to tolerate this legitimate risk, should avoid investing in Gilead from a remdesivir standpoint.
7. Lessons from other essential anti-infectives and strategic stockpiling
If remdesivir emerges as the standard of care for the treatment of COVID-19, we envisage it will follow a similar trajectory to oseltamivir (Tamiflu) seen in the context of flu. As we witnessed in the years following the Swine Flu pandemic of 2009, governments were swift to stockpile Tamiflu. In fact, the UK government alone spent $685 million stockpiling 40 million courses of Tamiflu ($17 per course for a population for over 60 million people). By 2014, Tamiflu had generated $18bn for Roche since launching in 1999. About half of this is estimated to have come from government stockpiling. It is our view that government stockpiling of remdesivir will drive high demand in the near term, should the drug become standard of care. As governments have increasing access to cheap money, we envisage that they will spare no expense buying remdesivir. In the longer term, the fact that SARS-Cov-2 is disseminating across the globe, and that its animal origin has yet to be definitively determined, it is likely that the virus will establish a foothold as a bone fide human pathogen, potentially becoming a seasonal phenomenon. The theoretical animal reservoir of this virus has the potential to maintain future outbreaks, if not identified and eliminated. Hence, if remdesivir is effective, it will likely also have long-term earning potential.
8. Signs of efficacy?
There are a number of positive signals emerging regarding remdesivir’s efficacy, which leads us to believe there is more than 50% chance of approval:
- Case reports of efficacy in the US and Italy (report in Italian).
- Reports of production ramping up in China.
- Gilead is escalating manufacturing capacity and supply.
- Comments by assistant director-general of the WHO, Bruce Aylward.
- Scientific rationale (technical background): remdesivir is an adenosine analogue that inhibits the RNA-dependent RNA polymerase (RdRP) of RNA-based viruses. It has demonstrated activity against a range of RNA viruses, including coronaviruses. It is thought that remdesivir leads to RNA chain termination as the RdRP tries to replicate the viral genome. Interestingly, biochemical experiments suggest that the activated form of remdesivir (remdesivir triphosphate) is more efficiently incorporated, by the MERS RdRP, into RNA than the natural substrate ATP. The paper also shows how remdesivir has different effects on the Ebola RdRP, as it not only causes RNA chain termination, but can be incorporated into nascent RNA replicated by MERS RdRP. We hypothesise that remdesivir incorporation may have downstream effects when these RNA molecules are subsequently re-replicated by RdRP and then translated by host ribosomes.
- Although remdesivir “disappointed” in Ebola, we point out that this trial compared remdesivir to three other therapeutics. There was no standard of care arm. With the COVID-19 trials (here and here), remdesivir is being compared to placebo (standard of care). This means that remdesivir only needs to be better than placebo, not other therapeutics, to demonstrate favourable results.
9. Target price of GILD stock
Here, we present a conservative model for the potential value that remdesivir can generate for Gilead, if the drug is approved for COVID-19. We assume that China and India will manufacture the drug for themselves independently of Gilead; however, should Gilead be able to strike a deal with these countries, there will be additional upside. Furthermore, we only include the population of countries who we believe will stockpile the drug. Regarding the cost of remdesivir, analysts at RBC Capital Markets, as reported by BioPharma Dive, assume a price per course of $450.
By using the prices of a 5-day course of essential IV anti-infective drugs, we can arrive at various price scenarios:
Model inputs are as follows:
We believe the most likely price of a 5-day course of remdesivir will be between $146.6 and $459.1.
Gilead trades on a Price/Sales multiple of 4.5x. This is nearer the lower end of its historical range over the last 10 years. Applying a conservative 4.0x Sales multiple (which Gilead traded around over 2018–2019) under the above scenarios yields:
On this basis we believe Gilead stock could reasonably see an increase of between 20–70% from current levels.
10. Price Action
GILD’s 1-year daily price chart shows a clear breakout over $70 following a sharp re-test:
Cumulative relative return charts vs. US Market (blue) and Biotechnology (yellow) confirm GILD’s recent price action is atypical:
11. Financials
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