Gilead Sciences: Can it do its namesake proud?

After the company’s Q1 and Q2 2017 financial results, it was likely that Gilead Sciences was planning something. The company maintained a huge cash pile, had some stock repurchases and provided extra dividends. Advice was given for the contrarian investor to step in, as there was sizable potential on the long-term horizon. It seems that the advice was right on point. From June 19th 2017 until September 12th 2017, the share price surged from $64.23 to $84.52 per share, which is equal to an increase of 31.59%.

Historic Low

On June 19, an article (Can Gilead Sciences Do Its Impressive Namesake Proud?) was published about the research-oriented biopharmaceutical corporation Gilead Sciences. The company, which is known for its bullish performance on the stock market, was at a historical low of $64.23 per share. The plummeting of Gilead’s share price raised questions, as the company had a large cash pile that could potentially be used for M&A practices. At that particular moment, an important question was raised by investors on why the company was at a historical low, while there was huge potential for M&A in the industry.

One of the main reasons for the share price decline was the decrease of the companies’ hepatitis C drug (HCV) franchise. A second reason was that investors were highly disappointed after the Q1 2017 financial results, as revenue and earnings further declined in comparison with Q1 2016.

“It seems the cash cow is becoming a lazy dog that should make room for a new star to rise.”

The above quote from the aforementioned article was highly applicable around June 2017. However, it currently seems that Gilead Sciences has proven that it is far from lazy, and that there is a new star on the rise.

Two weeks ago, Gilead Sciences had a takeover bid accepted by Kite Pharma, a clinical stage biopharmaceutical company well known for its developments of novel cancer immunotherapy products (e.g. CAR-T). The accepted takeover bid had a value of $11.9bn, which is equal to $180 per share. The transaction will be finalised around Q4 2017.

Contrarian Beliefs

Some analysts may question Gilead’s accepted takeover bid of $11.9bn (a 29% premium), as the company mentioned that new drug candidates for acquisition were overpriced. Recently, Gilead Sciences held a conference call with investment bank analysts, where the company explained why it has initiated the acquisition process of Kite Pharma. In this meeting Gilead Sciences mentioned the following three reasons that eased analyst concerns:

1. Kite Pharma has an equally important pipeline – especially its CAR-T candidate, which is an innovative solution to combatting cancer using a patient’s own immune system to fight tumours.
2. Gilead Sciences expects a healthy reimbursement for innovative treatment – the CAR-T candidate is expected to provide a return on investment in the medium-term.
3. The Kite Pharma acquisition is not just a one drug development acquisition – Kite Pharma and its innovative drug developments have the potential to become a standalone unit under the Gilead Sciences umbrella with a diverse set of drugs in the pipeline.

It can be argued that Gilead Sciences was right to wait with the use of its cash mountain for M&A. It seems the acquisition of Kite Pharma was correctly timed, as one of Gilead’s direct competitors, Novartis, won FDA approval for its life-changing CAR-T cancer drug Kymriah just after Gilead’s takeover bid was accepted by Kite Pharma. This will likely increase Kite Pharma’s chances of receiving a regulatory green light for one of its CAR-T drugs Axi-Cel in November 2017.

Share Price Developments

Overall, the stock market reacted positively from June 2017 onwards, as can be seen from the chart below.

Source: Y Charts

From the above chart, it is visible that Gilead Sciences had been in a downward trend until June 2017. Eventually, the downward trend moved to an upward trend as soon as good earnings were presented ($2.56 EPS versus the consensus estimate of $2.11 EPS).

Consequently, the share price increased from approximately $64 to $76 on August 1, which is a share price increase of 18.75%. Moreover, a beneficial dividend announcement and M&A activity speculations gave the share price an additional boost around mid-August. As a result, the stock price has increased to $84.52 per share at the moment of writing this article.

Future Outlook

In the Q2 2017 earnings conference call, CEO John C. Milligan mentioned the following:

“So we have been very, very active, as we always are. We have beefed up our groups, as you are aware, so that we can evaluate more different kind of opportunities. And so we are working very hard behind the scenes here on a number of things, but I certainly cannot direct you to anything specific, other than to say that we are very, very active. And when the things are right for us, we will announce them. That is all I can say.” 

Milligan was right around that time- Gilead Sciences had been genuinely busy, as the company commenced the acquisition process of Kite Pharma. The large question is if there are more acquisitions on Gilead’s schedule. Gilead’s cash position is still approximately $25bn after the Kite Pharma acquisition, so there is still room for additional acquisitions. It is likely that Galapagos could be the next target company, as the company is valued at $5bn. Aside from Galapagos, more acquisitions are expected in the near future and the Kite Pharma acquisition is likely to be a catalyst for future growth.

Conclusion

At the moment, Gilead really is on its way to make its namesake proud. In addition, there is a significant chance that Kite’s CAR-T Axi-Cel drug will be FDA approved in November 2017, as Novartis has just had its Kymriah CAR-T cancer drug FDA approved. Therefore, it is highly likely that Gilead’s share price will further increase in the coming months.