A Look at Gilead and Its Potential $10 Billion Blunder
December 2, 2016
By Mark Terry, BioSpace.com Breaking News Staff
Investors have been wondering about Gilead Sciences ’s strategy for some time, exacerbated recently by a somewhat gloomy third-quarter report. Brian Orelli, writing for The Motley Fool, scrutinizes one of the company’s recent actions, wondering if it made a $10 billion blunder.
The third-quarter report outlined sagging sales and revenue, as well as a distressing list of failed clinical trials. The company reported third-quarter product sales of $7.405 billion, down from $8.211 billion in the same period in 2015. Total revenues were $7.5 billion, down from $8.295 billion in the same period. Even its HIV and liver diseases area, facing less competition than its Hepatitis C franchise, were down $6.8 billion compared to $7.7 billion in the 2015 third quarter.
But those aren’t what Orelli is focused on. What he’s looking at is Gilead spending $10 billion to repurchase its own stock. They look like this: Accelerated stock repurchase (ASR) …. $5 billion for $92.09 average price per share
First-quarter open market …. $3.0 billion for $88.24 average price per share
Second-quarter open market …. $1.0 billion for $100 average price per share
Third-quarter open market …. $1.0 billion for $83.33 average price per share
The problem? Gilead Sciences is currently trading for $73.01 per share.
Orelli writes, “Gilead’s financial department would have clearly been better off waiting until now to spend that $10 billion, allowing it to repurchase more shares at today’s lower price. That said, hindsight is always 20/20 and with insider information, companies typically have small windows to make repurchases each quarter.”
Although on a straightforward analysis, it looks like Gilead is losing money on its own stock, there are actual benefits. For each share the company repurchases, which is currently around 110 million shares, it saves on $1.88 in dividends it no longer has to pay each year. Orelli writes, “At a yield around 2 percent based on the average price of the purchases, Gilead is saving at about the same rate as its interest payments on its notes due in 2022. And the yield is certainly more than it could get leaving the cash in the bank.”
The question then is, Was it worthwhile to invest $10 billion in a share repurchase than it would have been to invest $10 billion in a company that has a product whose revenue can add to its bottom line?
Gilead has a licensing deal with Galapagos for filgotnib for inflammatory diseases that cost $725 million, and could go up to $1.35 billion in milestones plus tiered royalties if the drug’s approved. It also bought Nimbus Therapeutics’ Acetyl-CoA Carboxylase inhibitor program for $400 million upfront and potentially another $800 million in milestones. At the moment, it’s too early to say if those will pan out.
Orelli notes that when the company bought Pharmasset for $11 billion, that netted Sovaldi for hepatitis C, which brought in $3.3 billion in this year’s third quarter all by itself. Definitely a good investment. But its other investments, such as YM BioSciences, haven’t been so dazzling, although, there are very few acquisitions in the biopharma sector that have been as high-performing as Sovaldi.
A lot of investors are encouraging Gilead to buy something—anything—and the sooner the better. The company’s president and chief executive officer, John Milligan, has said, “You don’t want the sense of urgency to overwhelm your discipline because then you’ll do things that don’t make long-term sense. We’ll do things when they make sense for us and not before then.”
Orelli writes, “Gilead might want to apply that discipline of avoiding a sense of urgency when repurchasing its own shares. The share price may continue downward until the biotech announces a solid acquisition or a pipeline success that has the potential to turnaround earnings growth.”