Over the last five years, Gilead Sciences (NASDAQ:GILD) has been one of the fastest-growing biotechs in the world. From June 2014 to June 2015, for example, Gilead's total revenue blasted northward at a compound annual growth rate of 30.1%, according to data compiled by S&P Capital IQ.
So it should come as no shock to learn that Gilead's stock has drastically outperformed the overall biotech industry, as well as the broader markets, during this time period:
This year, though, Gilead's share price has failed to continue its blistering upward pace, leaving many investors wondering what happened to this rising star:
As I've discussed previously, Gilead's slowing growth is due to a couple of factors. Most importantly, the biotech's hep C franchise, composed of Sovaldi and Harvoni, is believed to be nearing its commercial apex thanks to a variety of issues, including continued resistance from payers, the natural dynamics of the hep C market, and the introduction of competing medicines.
Wall Street thinks these headwinds will cause Gilead's total revenue to slow to a near-stagnant 0.25% CAGR over the next five years:
Perhaps as a direct response to its slow top-line growth, Gilead's management decided to ramp up its share buyback program by $15 billion last February, giving the company around $18 billion to spend on buybacks over the next five years. These share buybacks should help Gilead's bottom line post a CAGR of 2.51% for the next five years:
While those aren't exactly exciting levels of growth, they're better than nothing, and they certainly beat projections for the company's top line.
The bigger issue, though, is that these two graphs illustrate why the biotech's stock can't seem to regain its footing -- and why the Street is clamoring for Gilead to plunge headfirst into the M&A game.
Why Wall Street may be wrong
I personally think these projections for Gilead's bottom and top lines will turn out to be way off base. By their own admission, analysts have Gilead generating huge free cash flows in the range of $15 billion to $18 billion per year over the next five years -- largely as a result of the biotech's almost ridiculous gross margin, which already stands at 88% to 90%.
That gives management a huge amount of flexibility to pursue a laundry list of avenues to create shareholder value. For example, Gilead could up its share buyback program even further, buy multiple mid-sized competitors, restructure debt, or super-size its dividend.
But I think the key takeaway from looking at Gilead's cash flows is that the biotech could have nearly $30 billion in cash, cash equivalents, and short-term investments in its war chest by the end of 2016. That estimate obviously comes with a lot of assumptions, but it shows what a little patience could mean for Gilead's shareholders.
In sum, Gilead might have a dull 2016 as it furthers its clinical development efforts and consolidates its resources for what could be a game-changing transaction. But eventually the levee will give way, and Gilead will have to do something with all that cash to break out of the doldrums.
Therefore investors with a long-term outlook shouldn't be put off by the Street's anemic forecast for this top biotech; instead, they may want to trust management's ability to put the vast resources at their disposal to good use.
George Budwell owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends 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.