Gilead Sciences (GILD 0.02%) has been an absolutely remarkable growth story over the past two years, with its share price climbing by a stunning 324%.
Gilead is now a huge company by market cap sandwiched in between the likes of industry stalwarts Amgen (AMGN 0.08%), Merck & Co. (MRK +0.25%), and Sanofi (SNY +3.77%):
Gilead is a bit of an oddball among its large-cap healthcare peers, however -- as its peers by market cap almost universally offer dividends, while it doesn't.
Given that the company's revenue has more than doubled in 2014 compared with a year ago, Gilead should have the resources to pay a dividend on the back of its hepatitis C franchise. A quick look at the company's quarterly cash flow from its operations strongly supports this assertion:
Even so, management eschewed a dividend back in May, deciding to use this huge uptick in cash to finance a $5 billion increase in its share buyback program instead. Moreover, Gilead's brass hasn't even hinted at offering a dividend anytime soon. With this in mind, let's consider whether management is wrong in its decision to forgo a dividend for the time being.
Gilead's growth story stems from its aggressive M&A strategy
Under the guidance of CEO John Martin, Gilead has purchased 12 clinical-stage biopharmas with the goal of diversifying its product pipeline and strengthening its core HIV franchise. In light of the fact that the company now has commercially available products in the cardiovascular, hepatitis C, oncology, and respiratory markets, and has continued growing its HIV franchise at the same time, I think it's safe to say that this strategy has worked out beautifully.
Gilead's aggressive M&A strategy, though, has left the company lagging behind its peers Amgen, Merck, and Sanofi when it comes to cold, hard cash:
At the height of Gilead's cash reserves in 2011, Martin decided to spend $11.2 billion to acquire Pharmasset for its experimental hepatitis C drug Sofosbuvir, depleting Gilead's cash reserves almost entirely.
Two years later, Gilead launched this drug under the brand name Sovaldi, generating record-breaking sales in the process. Sovaldi is also a critical component of the next generation of hepatitis C therapy, Harvoni, which is expected to dominate the massive hepatitis C market for years to come. All told, this risky decision turned out to be a brilliant move on Martin's part, but Gilead does have a much lower cash position compared with its new peer group as a result.
Although Gilead's cash reserves have been rapidly improving in recent quarters because of Sovaldi's monster launch, it is still a way away from its former highs in 2011, meaning that a dividend probably isn't in shareholders' best interest right now.
Will Gilead ever offer a dividend?
If Harvoni lives up to expectations, Gilead should be able to replenish its cash position within the next 12 to 14 months. That said, I wouldn't hold my breath waiting for a dividend from this biotech. Unlike its peers, Gilead has made good use of its cash to grow revenue via strategic acquisitions, whereas Amgen, Merck, and Sanofi have tended to rely more on their clinical pipelines to deliver the next group of major drugs. Moving forward, Gilead will, I think, continue to be aggressive on the M&A front, reducing the chances that management will seriously consider authorizing a dividend payment in the near term.
