Once upon a time, Gilead Sciences (GILD 1.91%) was one of the hottest biotech stocks on the market. But for most of the last two years, Gilead was anything but hot, with its market cap losing nearly half of its value at one point. The company in many respects was a victim of its own success, with previous growth from the astronomical rise of its hepatitis C drugs fizzling out as patients were cured.
Gilead announced on Monday that it's acquiring Kite Pharma (NASDAQ: KITE) for $11.9 billion. Some investors are hoping that this new chapter for Gilead will bring a more positive story. Has a big bounce begun for the beleaguered biotech?
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Don't count on it
Naysayers can make a pretty compelling argument that the Kite acquisition won't be enough to turn things around for Gilead. The company's own words actually help bolster their case. In its press release announcing the Kite Pharma buyout, Gilead Sciences stated that the acquisition "is expected to be neutral to earnings by year three and accretive thereafter."
Let's put things into perspective. Gilead's earnings fell by more than 24% in the first quarter and another 12% in the second quarter. There's no end yet in sight for the biotech's hepatitis C slump. And Gilead faces a new challenge in hep-C: AbbVie won U.S. approval for its pan-genotypic drug, Mavyret, in early August.
Even if Kite wins approval for its CAR-T therapy axi-cel as expected, Gilead won't see any benefit to its bottom line until over three years from now. The news is actually worse than that, though. Gilead said the deal should be neutral to earnings by year three. That implies the biotech anticipates earnings will be negatively affected for the first couple of years.
There's a legitimate question as to whether a rebound for Gilead stock is warranted at this point. The company's earnings continue to deteriorate, and quite frankly, nothing appears to have changed that dynamic for the better at this point.
Signs point to yes
Now let's look at the optimistic viewpoint. Some investors could maintain that a big bounce started for Gilead even before the Kite deal was announced, and that momentum is only picking up after the news broke. Just look at Gilead's stock performance this year.
Halfway through 2017, Gilead stock was down more than 10% for the year. Now it's in positive territory. That by itself certainly indicates that a rebound is under way.
One thing that skeptics could be overlooking is the psychological boost that the Kite acquisition could provide for investors interested in Gilead Sciences. Although the transaction won't help the bottom line for a few years to come, there's no question in my mind that Gilead will be in a much stronger position in the oncology market with Kite Pharma's assets in its fold. Investors focus on the future -- and Gilead's future should be brighter over the long run as a result of its latest acquisition.
There's also good reason to believe that the Kite deal is only the beginning of a broader buying spree for Gilead. In his comments during the conference call discussion of the acquisition, Gilead CEO John Milligan said the biotech wouldn't be "going quietly after this deal." I suspect that some investors were beginning to wonder if Gilead would ever make a deal. Now they know the company has the willingness to do so -- and make even more. Again, that should bode well for Gilead's future.
Rest of the story
I realize that there are things to nitpick about Gilead's buyout of Kite Pharma. But there were also plenty of folks who criticized the company's acquisition of Pharmasset in 2012, in which Gilead gained Sovaldi. That deal turned out quite well. I expect the Kite transaction will, too.
Gilead Sciences remains one of the biggest biotechs in the world with an exceptionally strong cash flow. It also still has a huge cash stockpile. The company claims one of the best pipelines in the industry. It pays a really attractive dividend. With the Kite acquisition, Gilead will immediately become a leader in the lucrative oncology arena. And oh, yes, the stock still trades at less than 10 times expected earnings.
My hunch is that Gilead's rebound will continue. And if it doesn't, it should. My prediction is that this fairy tale will end happily ever after -- even if there are a few more twists and turns in the plot.
