Gilead Sciences (NASDAQ:GILD) reported enough bad news on Tuesday to inspire a blues song: Falling revenue. Sinking earnings. Horrible outlook for this year. Perhaps the big biotech needs to develop an antidepressant -- just to give to its shareholders.
On the other hand, there were some clues in Gilead's conference call with analysts that could mean better days are on the way. Everyone knows the biotech needs to make an acquisition. I think signs could be pointing to a massive one. (Quotes come from S&P Global Market Intelligence.)
What was said
My guess is that Gilead CEO John Milligan is probably a pretty good poker player. He doesn't reveal too much with his comments. In his introductory remarks on the conference call, Milligan said the company will focus on "pursuing partnerships or acquisitions that are the right strategic fit" in 2017. He added in later comments that Gilead doesn't need to make a deal to boost its cash flow, because the company feels "very comfortable" on that front already.
When asked if Gilead Sciences can grow without an acquisition, Milligan didn't directly address the question. He noted the company's headwinds in the hepatitis C virus (HCV) market and the loss of patent protection for a few drugs over the next few years. Milligan said that these factors make it "challenging ... to grow without some sort of acquisition." However, he didn't specifically state that an acquisition was required to achieve growth.
Gilead CFO Robin Washington, on the other hand, made some statements that might be key to understanding what the biotech will do next. She hinted that Gilead was already thinking about taking on additional debt to possibly fund an acquisition.
In her opening comments, Washington said that leveraging capital to "pursue external opportunities" was a top focus for 2017, adding that Gilead would reduce its spending on share buybacks as a result.
When asked about Gilead's debt leverage, Washington responded, "I think we've been fairly thoughtful, particularly dealing with the rating agencies and then thinking about debt levels that we feel very comfortable that we can support acquisitions and increase our debt-to-EBITDA."
She added that Gilead should be able to reduce its debt in the future with the cash flow from its existing franchises. Potential corporate tax reform in the U.S., including the possible repatriation of overseas cash at a reduced tax rate, would "make all that even simpler," according to Washington.
I was especially intrigued by Washington's last statement before moving on to the next question. She said the company was "comfortable that from an asset standpoint that we could support any type of acquisition that we'd need to do to support Gilead's growth."
Reading between the lines
So what we know from Gilead's conference call is that the company plans to make at least one acquisition and perhaps more. We can infer that an acquisition is likely to happen this year, since "pursuing external opportunities" is a top priority for 2017.
I think there's potentially one other thing we can glean from the CFO's comments: Gilead is preparing to spend a lot of cash. The company wouldn't be talking to rating agencies about debt leverage if it wasn't seriously contemplating borrowing a considerable sum of money.
It's possible that Gilead could simply be looking to borrow to avoid having to pay U.S. taxes on its big chunk of cash parked overseas. Gilead reported a cash position of $32.4 billion at the end of 2016, including cash, cash equivalents, and marketable securities. The company hasn't stated yet how much of that cash is held in the U.S. versus overseas, but as of Sept. 30, 2016, Gilead had $25.2 billion in accounts outside the United States.
On the other hand, the company could be looking to make a major acquisition rather than a smaller one. Considering Gilead's dismal growth prospects for the next few years, my hunch is that we will see the company go big.
Who could it be?
Before Gilead announced its weak outlook for 2017, I thought the company would be more likely to buy one or two smaller biotechs with promising pipelines. Kite Pharmaceuticals (NASDAQ:KITE), for example, would be a good fit with that strategy.
Kite's market cap currently stands at $2.6 billion. The company has a potential winner with chimeric antigen receptor (CAR) KTE-C19. Kite expects to complete its U.S. regulatory submission for the drug in the first quarter of 2017.
Now, though, my thinking has changed. Kite remains a possible acquisition target for Gilead, but the company could be looking for a more transformative deal. Many investors would like to see Gilead buy Incyte (NASDAQ:INCY). Milligan has stated in the past that Gilead would like to bolster its oncology portfolio. Incyte's Jakafi and its pipeline of targeted therapy and immunotherapy candidates would definitely do the trick.
Incyte would require Gilead to pay up. The biotech's market cap is currently $23 billion. Gilead would probably have to offer upward of $30 billion to make a deal happen. Based on Washington's comments in the call on Tuesday, I wouldn't be surprised if the company is willing to fork over that amount.
I could even see Gilead going a totally different route by picking up a rare-disease portfolio with strong growth potential. Vertex Pharmaceuticals (NASDAQ:VRTX) is a possibility. Vertex has a couple of approved cystic fibrosis drugs and a solid pipeline. Its market cap of $22 billion is a little less than Incyte's.
Even better, analysts project that Vertex will grow earnings over the next several years by nearly 67% on average. That's higher than Wall Street's forecast of 50% annual earnings growth for Incyte. John Milligan might like the prospect of buying that kind of growth for $30 billion or so.
Of course, all of this is speculation for now. But if Gilead really wants to improve its earnings outlook, it's going to have to spend a lot of money to accomplish that goal. Based on what the biotech's executives are saying, I think Gilead is ready to open the checkbook.