Gilead Sciences Thinks Its Own Stock Is a Biotech Bargain

Last quarter, Gilead Sciences (GILD 0.20%) forked over $8 billion to buy back 46 million shares of its stock -- and despite that massive repurchase, the company still plans on spending billions of dollars more on buybacks this year. Does Gilead Sciences' commitment to share repurchases suggest management thinks its stock is the best bargain in biotech? In this clip from the Industry Focus: Healthcare podcast, Motley Fool analyst Kristine Harjes and contributor Todd Campbell discuss Gilead Sciences' plans for its cash stockpile.

A transcript follows the video.

This podcast was recorded on May 4, 2016. 

Kristine Harjes: This is also a company that has quite a bit of cash on the books -- 21 billion at last count. One of our listeners wrote in to [email protected]. This is Mark Fitzgerald of Burlington, Vt. He wrote in asking, pretty much, what Gilead plans to do with all this cash, and whether an acquisition might be in the cards. What do you think, Todd?

Todd Campbell: That's a $21 billion question.

Harjes: It's exactly what it is.

Campbell: Yeah, they have a ton of cash. The funny thing is that cash is after they bought back $8 billion worth of their own stock last quarter.

Harjes: They have been incredibly --

Campbell: ... buy back $8 billion and still have $21 billion in the bank.

Harjes: I'll note, before we move on from that, that was at an average price $92.09 per share, which is 7.6 times 2016 earnings. They're getting their own stock back really, really cheap and they've absolutely implied that they think their own company is the best deal on the market right now, which is why we haven't seen a splashy acquisition.

Campbell: Right, I mean, if you're looking at it and you're saying, OK, you've got companies out there [...] is one that we talked about in the past, that theoretically could be up for sale, that Gilead could walk in and say, "I want to expand into cancer drugs, I'll make a bid for this company." But they're also looking at it and saying, "If management or the board wants too much for that, why don't I just take that money and pour it back into my own stock? I've still got a great business, I can buy it cheap."

Harjes: Yeah, since 2012 they've repurchased 17% of their shares outstanding. I do think that they are looking for external opportunities as well, but for now they don't think they can do any better than Gilead.

Campbell: Right, they're looking for the right deal at the right price. Their oncology team has suffered a few blows recently, because Zydelig's trials got halted because of some safety concerns, and their oncology head has since left. You've got a situation now where they're trying to figure out, "Where do we want to go from here?" While they figure that out, why not just spend that money on dividends and buybacks, right? They increased their dividend by 10%, so they've got plenty of money kicking around that they can use to reward shareholders and that they can continue to plow back into their own drug development. They're working on a drug for NASH, for example, which is another liver disease that could be a huge indication. I think they're spending $3 billion in R&D, so they've got plenty of money kicking around that they can use for future growth.

Harjes: Seems like our answer is pretty much the answer that management actually gives when questioned about this, which is that they'll make the right move when the right opportunity comes. Thanks for helping me answer this one, Todd. If any of other listeners have questions for us feel free, write in at [email protected].