Can Gilead Sciences (NASDAQ:GILD) keep the momentum going?
The stock is up more than 20% over the past 12 months -- but those gains were attained by September of last year. Since then, Gilead's shares have bounced up and down with large swings but little net effect. Don't be lulled into thinking the biotech's best days are behind it, though. There are plenty of elements in Gilead's favor. In fact, I'd say there are at least 11.7 billion reasons why Gilead Science should keep on winning.
How the billions grew
At the end of 2013, Gilead reported cash (including cash equivalents and marketable securities) of $2.57 billion. That figure wasn't far off from the $2.58 billion in cash the biotech had at the end of 2012. As of Dec. 31, 2014, though, Gilead's cash stockpile amounted to over $11.7 billion. Yep -- the company socked away over $9 billion in one year.
How Gilead managed to do it is no mystery. Hepatitis C drugs Sovaldi and Harvoni proved to be cash cows. Sovaldi racked up $10.28 billion in sales in its first full year on the market. Harvoni, which combines Sovaldi with another Gilead drug, ledipasvir, generated over $2.1 billion in sales in the first three months or so since its approval.
Both drugs should continue to be successful for Gilead, even with reduced pricing resulting from the biotech's competitive battle with AbbVie. But perhaps an even bigger reason to expect great things from Gilead in the years to come stems from the $11.7 billion in cash that the two drugs have built up -- and what Gilead might do with that money.
Wheeling and dealing
Gilead had almost $10 billion in cash at the end of 2011. Rather than just save it for a rainy day, the company decided to buy Pharmasset. The deal carried a price tag of $11 billion, which Gilead financed using cash and taking on additional debt.
Some laughed at Gilead for spending so much on Pharmasset, which claimed three hepatitis C drugs in its pipeline. One of those drugs, however, happened to be what is now Sovaldi. Gilead recovered its investment within less than a year of Sovaldi gaining regulatory approval.
Most deals aren't that spectacularly successful, of course. In 2006, for example, Gilead paid $2.5 billion in its acquisition of Myogen, picking up pulmonary arterial hypertension drug Letairis in the process. The drug has generated over $2.3 billion in the ensuing years. Gilead is close to achieving a positive return on the investment, but it's taken eight years to get to that point.
Letairis didn't fit as nicely into Gilead's existing product lineup as Pharmasset's hepatitis C drugs. Gilead's most recent purchase fit quite well, though. In January, the biotech bought privately held Phenex Pharmaceuticals' development program for nonalcoholic steatohepatitis, or NASH. This could turn out to be a great move, since having a NASH treatment complements Gilead's hepatitis C franchise.
Burning a hole?
Gilead paid Phenex Pharmaceuticals an undisclosed up-front payment, but the maximum payout if everything goes perfectly is $470 million. That still leaves a lot of money at Gilead's disposal to use in some way that benefits investors.
Two such ways are forthcoming soon. Earlier this month Gilead announced plans to initiate a quarterly dividend of $0.43 per share. The company's board of directors also authorized a five-year share buyback plan totaling $15 billion.
But this dividend represents only 17% of the consensus earnings estimate for 2015. Gilead shouldn't have to dig into cash at all for financing there. And the share repurchase plan amounts to an average of $3 billion per year. The company can spin off that kind of cash with both hands tied behind its back.
The bottom line is that even with a new dividend and buyback program, Gilead will still have a large stockpile of money that it could invest somehow, somewhere. Perhaps the biotech will find another rare liver disease drug in development that it likes. Or it could venture into a different indication altogether.
I don't think the large amount of cash is burning a hole in Gilead's pocket. The company's management will think through any potential acquisitions. However, expect more deals to come. When they do, not all will be winners -- but some will. My hunch is that those future success stories, combined with ginormous HIV/AIDS and hepatitis C franchises, will keep Gilead in the winner's circle for a long time to come.
Keith Speights owns shares of Gilead Sciences, but his part of that $11.7 billion in cash isn't nearly as big as he wishes it was. The Motley Fool recommends and owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.