Will Gilead & Merck’s Share Prices Benefit From HIV Drug Partnership?

Biotech companies Gilead [GILD] and Merck’s [MRK] share prices saw a boost following news that the two will work together to develop HIV treatments.

The work will draw on both firms’ expertise in the space, combining Gilead’s lenacapavir and Merck’s islatravir to provide, according to a press release, “a two-drug regime with the potential to provide new meaningful treatment options for people living with HIV”. The combination will be tested both orally and as an injection. Both drugs are in late-stage trials and have demonstrated effectiveness at low dosages.

Under the terms of the deal, Gilead will shoulder 60% of expenses and lead commercialisation of the oral product in the United States, while Merck will lead commercialisation in Europe and the rest of the world. Revenue will be split 50/50 up to $2bn for the oral combination, after which sales will be split 65/35, with Gilead taking the larger share.

“This collaboration with Gilead brings together two companies dedicated to the fight against HIV to develop potential new long-acting treatment options, and is an important step forward in our strategy to harness the full potential of islatravir for the treatment of HIV,” said Kenneth C. Frazier, chairman and CEO at Merck.

How have Gilead and Merck’s share prices reacted?

Gilead and Merck’s share prices are both up since the deal was announced, although both increases have been choppy. Gilead’s share price has risen 6.45% since 12 March’s close, while Merck’s share price is up almost 3.90% in the same time period (both to 22 March’s close). While the biotech firms saw a drop at the start of trading on 17 March, those losses have been recouped, indicating that investors are backing the deal.

Looking over the 12-month timeframe, the two biotech stocks have had varying fortunes. Gilead’s share price is down 9.75%, while Merck’s is up 16.73%. Investors will be hoping that the partnership will help Gilead’s share price regain its $85.97 52-week high, with the stock trading a fraction below both its 50-day and 200-day moving average (as of 22 March’s close).

Gilead’s share price has an average $74.54 analyst price target, based on data from Yahoo Finance. This would see a 13.75% upside on 22 March’s closing price. Merck has a $96.33 average analyst price target, which would see a 24.3% upside on the current price (through 22 March’s close).

Where next?

According to a report from Allied Market Research, the HIV Drugs Market is expected to be worth $36.49bn by 2027, growing at a CAGR of 3.8% from 2020 to 2027. North America was the biggest market in 2019, accounting for almost half of the total market share, and is expected to maintain its dominance until 2027. By combining forces, both Gilead and Merck look set to benefit from the growing demand for HIV treatments.

"The deal should help reinforce Gilead's leadership and life cycle in HIV, turn a potential competitor into an ally and drive future growth in its core business," RBC Capital Markets analyst Brian Abrahams said in a report to clients, as reported by Investor’s Business Daily. Abrahams has an outperform rating on Gilead’s stock.

Is there opportunity in biotech?

Over the past year, the biotech investment theme has grown circa 57%, according to our thematic ETF screener. Digging into the four underlying ETFs, the SPDR S&P Biotech ETF [XBI US] is the top performer with a 109% gain in the past 12 months, however, XBI US has declined just over 7% in the past month (as of 18 March). The iShares Nasdaq Biotechnology ETF [IBB US], which counts Gilead as its second-biggest holding, has performed better with a 4.7% dip.

The declines are partly due to the wider tech selloff, as well as investors taking profits after betting on vaccine stocks last year. Right now, it seems that analysts still think there is further upside in both Gilead and Merck’s share prices. Investors will need to decide if this applies to the wider biotech investment theme, and whether the current prices represent an opportunity.