Is This the Solution to Gilead Sciences' Woes?

By Motley Fool Staff Markets Fool.com

Sliding hepatitis C treatment sales and discouraging news regarding its clinical-stage drug pipeline caused Gilead Sciences (NASDAQ: GILD) shares to tumble 29% in 2016. Can management rekindle investor optimism in 2017?

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In this clip from The Motley Fool's Industry Focus: Healthcarepodcast, analyst Kristine Harjes is joined by Todd Campbell to discuss what Gilead Sciences may do to get back on track, including how management could use its $31 billion cash stockpile to spark growth.

A full transcript follows the video.

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This podcast was recorded on Jan. 4, 2017.

Kristine Harjes: Gilead Sciences. What do you think they need to resolve to do in 2017?

Todd Campbell: Gilead Sciences needs to lose a little weight, too.

Harjes: (laughs) Yeah! That's a good way of putting it. This is a pretty bloated company, if you're talking about cash. They have $32 billion just sitting there in cash and equivalents, and it's been weighing them down.

Campbell: Oh, boy. They have so much money on the balance sheet, and it's almost like investors are, "Do you even know what you want to do with it?" They've said over and over, quarter after quarter, "We want to put it to work, we want to buy smart, we want to acquire companies at the right price." But we've also, at the same time, seen a lot of high-profile deals get gone that could have reignited investor enthusiasm last year. Gilead Sciences has struggled a bit over the last 12 months -- declining sales because of lower unit volume growth for hepatitis C and some price competition. They could use some positive news here in 2017 that helps show investors, "This is our path forward to growth."

Harjes: Yeah. I give this company a lot of credit, and I do trust their management team a ton, but some time in 2017, they're going to have to pull the trigger.

Campbell: You would think so. They've been pretty smart about raising money and padding that balance sheet at cheap rates. They have the dividend that they're paying out to people, you could argue, wouldn't that money be better off used somewhere else? But right now, they're not using that money for anything, so yeah, give it back in a dividend.

Harjes: Right, that or those share buybacks. They've been very generous about those.

Campbell: They did, they did $10 billion worth of share buybacks in the first three quarters of the year, but that's slowed down dramatically. In Q3, they only bought back about $1 billion, and a lot of people thought it was maybe a sign that they were getting ready to make a push and do a deal. I don't know. There's no question that M&A valuation has gotten off the charts crazy. Medivation went for about 14 times sales. I've seen some studies that say we're now in the mid to high double digits. There's a price, there's a deal out there right now that's being theoretically negotiated for Actelion between Johnson & Johnson, Actelion, and Sanofi, and that could be at a multiple of 14-15X sales. So, I understand that these deals are pricey now. But at the same time, you have a company like Pfizer, who also has a ton of cash out there, and they gave investors a pathway toward their growth. They made a big splash with biosimilars, which could be a big market over the course of the next decade. We'll call it, for lack of a better term, generic drugs biologics. It's a new thing we've talked about in the past on the show. And then, of course, with buying the leading prostate cancer drug, they showed that they're committed to growing in cancer. So, I think Gilead needs to make some of those same kind of moves to show investors, "This is how we're going to grow over the course of the next five or ten years."

Harjes: Right. And speaking of cancer, they did give us a little bit of a clue recently. I forget if the news came out this morning or not, but it was within the last couple of days. They just hired a new senior vice president of hematology and oncology. This is somebody named Alessandro Riva, who comes from Novartis, where he was the head of oncology. This suggests to me that that's what they're looking to do -- beef up their oncology unit. It's not done well in the past, but I think they're going to be persistent about it. If I had to guess, I would say that is the field in which we'll see the acquisition made when and if it comes.

Campbell: Right. I absolutely agree with you. They're obviously committing to it. Zydelig has not been a success for them since its launch. We'll see. Maybe we should start making a list of possible targets in cancer.

Kristine Harjes owns shares of Gilead Sciences and Johnson and Johnson. Todd Campbell owns shares of Gilead Sciences and Pfizer. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool recommends Johnson and Johnson. The Motley Fool has a disclosure policy.