We've Got You 'Covered' on This Bet on Big Pharma

Today we are teeing up Big Pharma name for a covered call trade opportunity. And we are doing so for some of the same reasons we recommended Pfizer PFE a few weekends ago.  

Gilead Sciences GILD is being hurt by falling sales from a Covid-related treatment as the pandemic is becoming endemic. That is taking attention away from growth in other areas of the company’s product portfolio. The stock, also like Pfizer's, pays a large dividend yield.

I have made money on Gilead in the past by buying it with covered call orders when it has traded at the lower end of a long-term range, which it currently inhabits. Straight equity has been a losing play as the stock has gone nowhere for just over a decade now. 

Gilead had a huge hit with the first hepatitis C treatment called Sovaldi, which was approved late in 2013. That product provided a huge surge of revenues for a couple of years but did not produce a recurring revenue stream and the space soon saw a couple of effective competitors as well.

Gilead management has squandered a lot of shareholder cash and goodwill over the years, making acquisitions that haven’t panned out. The latest failure seems to be the $4.9 billion purchase of small biotech Forty Seven back in 2020. Gilead has quietly ditched development around an anti-CD47 monoclonal antibody called magrolimab that was the primary asset acquired with that buyout. Gilead also just took a pre-tax IPR&D impairment charge of $2.4 billion within its first-quarter earnings report. This was related to assets acquired from the purchase of Immunomedics in 2020.

The one thing that Gilead has done quite well over the years is to maintain its primacy in the HIV space, consistently rolling out better versions of drugs to treat the chronic disease. HIV still makes up approximately two-thirds of its overall revenues of just north of $27 billion. 

Sales from its Covid-19 drug Veklury are projected to continue to fall significantly in 2024 with management guiding to just $1.3 billion in revenues from the compound this year. However, Gilead should produce minor overall sales growth this year thanks to continued but tepid sales growth of its HIV franchise and much faster growth from its newer oncology products, which should produce well north of $3 billion in sales in 2024.

Gilead posted earnings of $6.72 per share in 2023. Earnings are projected to fall to just under $4.00 a share in 2024. However, that is because of how the company is accounting for a recent acquisition of CymaBay Therapeutics CBAY for $4.3 billion in March. Profits are expected to bounce back to approximately $7.30 per share in 2025. 

At around $65.00 a share, GILD trades at less than 10 times trailing earnings. The stock also sports a dividend yield of 4.7%, slightly higher than the current yield on the 10-Year Treasury. That makes it a solid value play in an overbought market — and its return can be enhanced by the simple covered call strategy highlighted below.

Option Strategy

Here is how one can initiate a position in GILD utilizing a covered call strategy. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.

Selecting the November $65 call strikes, fashion a covered call order with a net debit in the $60.40 to $60.60 a share range (net stock price - option premium). Liquidity is excellent with the options against this equity. 

This strategy provides downside protection of 9% over the duration of the trade, which includes two quarterly dividend payouts of $0.77 a share. This strategy also provides nearly 10% return potential, including dividends, even if the stock trades flat over the just-under-seven-month option duration. 

With the stock’s current valuation and dividend yield, this should be a low beta trade.

At the time of publication, Jensen was long GILD and PFE.