Good morning! Today’s word count is 2,101 words, or an 11-minute read. Let’s get to it:
Market Summary (11:15 A.M. ET): “The S&P 500 ticked higher but was poised for a weekly loss, with investors unmoved by the presidential debate and remaining focused on stimulus negotiations and earnings,” WSJ writes.
- S&P 500: $3,459.13 (+0.16%)
- Nasdaq: $11,500.78 (-0.05%)
- Bitcoin: $12,931.46 (+0.30%)
- Gold: $1,900.90 (-0.19%)
- U.S. 10-Year: 0.852%
Justin Oh’s Daily Read
See No. 2 for analysis on remdesivir. Remdesivir maker Gilead ($GILD) is trading at 7.4x estimated 2021 EBITDA, which is mostly in line with its valuation in 2019.
It looks like analysts are already projecting $2.3 to $2.7 billion in Remdesivir sales in 2021. These estimates seem fair, and there is probably upside to these numbers if Remdesivir is one of two Covid-19 treatments used globally. But given my belief that a vaccine will materially reduce the number of cases and hospitalizations after 2021, this business line could shrink dramatically in 2022 and lower the fair value of $GILD for next year.
One could argue $GILD has a very high 12% free cash flow yield (i.e., it generates 12% of its value in cash per year) and a healthy 4.5% dividend yield. But not being a biotech expert, I have a hard time having confidence in their ability to reinvest this cash into new lucrative drugs, which is substantially their only way to grow.
With the caveat that I am not a biotech analyst and this is a quick read, I think this stock looks reasonably priced for now and not interesting enough to invest.
Covid-19 Drug Remdesivir Fully Approved by FDA
The FDA has granted full approval to Gilead Sciences’ remdesivir, “making it the first Covid-19 treatment deemed safe and effective by the regulator,” WSJ reports.
Test Run: The drug has treated hospitalized Covid-19 patients since receiving a provisional clearance, or emergency-use authorization, in May.
- President Donald Trump received remdesivir and Regeneron’s experimental antibody drug in early October after being hospitalized with Covid-19.
The Backstory: Remdesivir was initially looked at as an Ebola treatment but proved less effective than other medicines. Gilead had been testing its impact on other coronaviruses when Covid-19 was identified in January. After a quick pivot, the company rolled out clinical trials in the U.S. and China.
How It Works: Remdesivir inhibits Covid-19’s ability to replicate within an infected patient’s cells. The typical treatment course for the drug, sold under the brand-name Veklury, is five or 10 days of daily intravenous infusions depending on case severity.
- Patients have to be ages 12 or older and require hospitalization for Covid-19. But the FDA did grant emergency-use of the drug for younger patients.
What The Data Says: Remdesivir kind of works, but is more so the go-to drug because of a lack of others to treat Covid-19.
- A U.S. trial of 1,062 patients found remdesivir improved patients’ recovery time by five days compared with placebo. It didn’t, however, show a statistical benefit in reducing deaths.
- Other studies have “failed to show a clinically meaningful benefit from taking remdesivir compared with standard treatment or placebo.”
The Outlook: Analysts project an estimated $4.4 billion in total remdesivir sales through 2020 and 2021.
- Gilead stock jumped up 3.8% in after-hours trading following the news.
From what I’ve read, Remdesivir’s latest pricing is $3,120 per five-day treatment ($624 per day) for private insurance plans. And it could be priced less for governments at $2,340 per treatment ($468 per day).
There are currently 41,000 Americans hospitalized with Covid-19, which seems to be around average for the pandemic. If Remdesivir becomes ubiquitous and every U.S. hospitalized patient was to receive the treatment at an average cost, that would translate into $22 million in Remdesivir sales per day or $8.1 billion U.S. annual revenue. Applying Gilead’s ($GILD) existing EBITDA margin of 50%, that represents a potential $4 billion in additional profits during the pandemic from Remdesivir in the U.S. alone.
But this number is unlikely because therapeutics like Remdesivir will likely be used for the more severe cases, and there are several competing therapeutics going to market soon. Trump himself received Regeneron in addition to Remdesivir. Also, don’t forget that when a vaccine comes to market, cases and hospitalizations will (hopefully) drastically decline.
The Final Presidential Debate: The Moments That Mattered
President Donald Trump and Democratic Nominee Joe Biden faced off in the second, and final, Presidential Debate before the Nov. 3 election. Here are the moments that mattered, per WSJ:
Covid-19: With the ongoing pandemic still at the center of the upcoming election, both candidates view the virus on opposite ends of the spectrum.
- Trump: “I say we’re learning to live with it. We have no choice. We can’t lock ourselves up in a basement like Joe does.”
- Biden: “He says, ‘We’re learning to live with it.’ People are learning to die with it.”
Taxes and Foreign Connections: Trump grilled Biden on his son Hunter’s overseas dealings and alleged Biden enriched “his family through his son’s business ties to Ukraine and China.” The former vice president vehemently denied the claim.
- Biden fired back on the subject of Trump’s refusal to release his tax returns to which the president said he prepaid “millions and millions” of dollars worth of taxes and would disclose them once his audit by the IRS was over.
Oil and Fracking: Biden laid out his intentions to transition away from oil, replacing it with renewable energy over time and eliminating federal subsidies for Big Oil. Trump jumped on the statement, saying, “Will you remember that, Texas? Will you remember that, Pennsylvania, Oklahoma?”
- Biden said he wouldn’t ban fracking but limit new permits on federal lands. His campaign also said after the debate that he would eliminate oil subsidies.
- Trump said voters couldn’t trust Biden, “accusing him of being beholden to climate-change activists in his party.”
Medicare and Immigration: Trump heavily criticized the Affordable Care Act, while Biden restated his support for a public option over a Medicare-for-all system.
- Biden became emotional speaking about the migrant children separate from their parents along the U.S.-Mexico border, saying Trump’s policies were “harsh and undermined American values.”
- Trump passed the blame onto his predecessor, Barack Obama, asking, “Who built the cages, Joe?”
Crime and Social Justice: Trump called out Biden for his role as a co-author of the 1994 crime bill, to which Biden acknowledged the “tough-on-crime” policies of the 1980s and 1990s were a mistake.
- Biden turned the discussion on Trump, accusing the president of dividing the nation.
- When asked about the Black Lives Matter movement, Trump pointed to his passage of a criminal justice reform bill and said he was “the least racist person in this room.”
According to the research I’m reading, a blue sweep (Biden win and Democrats take control of the Senate) appears like the most likely outcome, according to the data. This result would provide the most fiscal stimulus to the economy in 2021, which would be the best outcome for the stock market, at least in the short term. Higher Democratic tax policies will be a headwind to corporate earnings in the long term, but these policies probably won’t be discussed until we are out of the Covid-19 pandemic.
However, the data shows the second most-likely outcome is a Biden win and Republican Senate, which would be the most damaging outcome for 2021 growth and 2021 stock prices because less stimulus and income support would get passed.
Since we possibly won’t know the full Senate results until January, we could be in a prolonged period of uncertainty in the markets until the start of 2021.
Second Coronavirus Wave Destabilizes European Recovery
“The second wave of the coronavirus now sweeping Europe is threatening to halt the region’s economic recovery, leaving many of its businesses and workers uncertain about their future and prolonging the time it will take for the continent to heal from the worst economic crisis in decades,” WSJ writes.
European governments imposed new restrictions on people and businesses to combat the rising case count as they try to avoid full lockdowns and protect the economy.
- However, evidence shows the second wave is already disrupting the recovery.
Two Worlds: Based on IHS Markit’s composite Purchasing Managers Index, Eurozone business activity fell for the first month since June.
- “The survey revealed a tale of two economies, with manufacturers enjoying the fastest growth since early-2018, but intensifying Covid-19 restrictions took an increasing toll on the services sector,” IHS Markit economist Chris Williamson said.
- Demand from overseas buyers buoyed companies such as Daimler AG, who capitalized on China’s voracious appetite for [Mercedes Benz] luxury sedans and SUVs.
- Tourism-reliant economies, such as Spain, have been decimated by the rising infection rate.
One Step Forward, Two Steps Back: The Eurozone economy is expected to report an 8% rise in third-quarter GDP, a promising sign after the 11.8% contraction of the three months through June.
- But that still leaves Europe’s economy smaller than before the pandemic.
- Growth could return if cases start to decrease, but it’s unclear how long Europe needs to return to pre-pandemic levels of output.
Long-Term: The International Monetary Fund projected a total 8.3% contraction for the Eurozone economy this year and a 5.3% rebound in 2021. If full-scale lockdowns are imposed, it could be worse.
- The IMF projects some countries won’t fully recover until 2023.
The rising number of cases in the U.S. and Europe is definitely something for us to keep an eye on. It looks like countries in Europe are more-inclined to resuming restrictions than the U.S. is currently. I still believe the biggest driver of global stocks over the next three months will be the U.S. presidential and senatorial elections’ results and the policies implied after that.
What’s Going On
It’s A Barbie World: “Add Barbie to the list of the pandemic’s biggest winners. Mattel Inc.’s flagship doll posted a 29% sales increase in the third quarter, leading the toy company to 10% revenue growth in the period. It was the largest quarterly increase posted by Barbie going back at least two decades, the company said.”
Comply To Survive: “Uber Technologies Inc. and Lyft Inc. must comply with an order that requires them to reclassify their drivers as employees, a California appeals court said Thursday, siding with a lower-court ruling from August that threatened to upend the companies’ business models. Uber and Lyft would need to comply with the reclassification within 30 days of a formal ruling, which could take several weeks. The companies, along with DoorDash Inc., Postmates Inc. and Instacart Inc. have raised more than $189 million for a ballot initiative on Nov. 3, asking that voters exempt them from such a reclassification. That result would supersede any court rulings.”
On The Offensive: “Walmart sued the federal government in an attempt to strike a pre-emptive blow against what it said is an impending opioid-related civil lawsuit from the Justice Department. The retail giant said in a lawsuit filed Thursday that the Justice Department and Drug Enforcement Administration are seeking to scapegoat the company for the federal government’s own regulatory and enforcement shortcomings in combating the opioid crisis. Walmart said the government is seeking steep financial penalties against the retailer for allegedly contributing to the opioid crisis by filling questionable prescriptions.”
Back To Wall Street: “Cybersecurity software provider McAfee returned to the public market when it began trading on the Nasdaq Thursday morning as ‘MCFE’.”
Unloading…: “Wells Fargo & Co. is exploring the sale of its asset-management unit, a business that could fetch more than $3 billion.”
Chip Trouble: “Intel shares dropped more than 10% in the wake of its fiscal third-quarter earnings report, as a precipitous decline in sales of server chips to large companies and government agencies took a significant bite out of its operating margin.”
A Bug’s Life: Lufax Holding Ltd., a smaller rival to Chinese financial-technology giant Ant Group Co., is seeking to raise as much as $2.4 billion from an initial public offering in the U.S.
Failed Fraud: “Wirecard AG’s bankruptcy administrator has sold the failed German fintech’s U.S. operations to a company backed by buyout specialist Centerbridge Partners LP, as it continues to dismantle the remains of the business and earn some cash for creditors.”
Tightening Grip: “Pressure is mounting on China’s Huawei Technologies Co., as growth slows in the face of tightening U.S. restrictions on its chip supplies and as an increasing number of countries shun its 5G gear.”