Gilead Looks to Continue Evolving Beyond HIV Products While Providing Defensive Dividends

Founded in 1987, Gilead is one of the world's leading biopharmaceutical companies. The firm's claim to fame is the breakthrough success it has had in treating HIV, a virus that attacks the body's immune system, and hepatitis C, a disease that can cause liver failure.

Gilead received regulatory approval for the first one-pill-daily HIV treatment in 2006. Previously, patients with HIV required as many as two dozen pills up to three times per day to manage their chronic condition.

Coupled with Gilead's continued breakthroughs to make its pills smaller and more effective, the company's HIV products still command roughly half of the HIV drug market despite intense competition and patent expirations over the years.

The company's latest-generation therapy, Biktarvy, accounts for most of Gilead's HIV sales and gained regulatory approval in 2018. This drug is the No. 1 prescribed regimen in the U.S. and enjoys patent protection through 2033.

Gilead is also working on long-acting HIV treatments, which may require an injection or pill only once every few months. These could represent the therapies of the future for treating HIV. Along with Biktarvy's patent protection, Gilead seems likely to hold its ground in this important business, which drives over 60% of the drug maker's sales.

But with such a high market share, Gilead's innovations in HIV drugs only help it maintain its leadership position since most patients buying its newest drugs are switching from other Gilead medications.

This mature growth profile is one reason why Gilead paid $11 billion to acquire Pharmasset in 2012, a drug developer working on experimental medicines to create a new standard of care for hepatitis C.

Pharmasset's drugs were so successful that they helped Gilead triple its overall sales from 2012 to 2015 when hepatitis C treatments accounted for nearly 60% of its revenue.

But unlike most diseases, which are chronic and thus require a patient to take medications continually, hepatitis C is a "one and done" condition.

As a result, the near 100% cure rate from Gilead's drugs resulted in a declining patient pool in developed markets. Coupled with rising competition and price pressure, this became a significant revenue headwind that was not offset by Gilead's new medications.

Hepatitis C drugs now represent less than 10% of Gilead's revenue, so the company faces a more manageable level of exposure going forward. Now, management is once more tasked with helping Gilead find a new growth engine.

In recent years, the firm has spent over $35 billion to acquire numerous cancer drugs, which have become one of the more lucrative areas for pharma companies. Advances in cancer research have created new opportunities for drugmakers to discover treatments for patients and caused many therapies to command high prices.

It may take years to gauge the success of Gilead's pivot into oncology drugs. Gilead seems likely to remain a "show me" story with investors until it returns to sustainable revenue growth and reduces its dependence on a small handful of antiviral treatments.

The company's BBB+ credit rating and conservative payout ratio policy remain supportive of the dividend, which has been raised each year since Gilead began making payouts in 2015.

However, investors considering the stock must be comfortable with Gilead's concentration in HIV drugs and ability to ward off intense competition in its legacy markets as it wades deeper into cancer drugs.