When it comes to balancing spending on future growth with returning money to investors, Gilead Sciences' (NASDAQ:GILD) management is one of the best in biotech. Will newly minted CEO, John Milligan, build upon the company's R&D, M&A, and shareholder-friendly track record?
In this clip of Industry Focus: Healthcare, Motley Fool analysts Michael Douglass and Kristine Harjes are joined by contributor Todd Campbell to discuss Gilead Sciences pipeline, M&A prospects, and its new CEO.
Listen to the full podcast by clicking here. A transcript follows the video.
This podcast was recorded on Feb. 3, 2016.
Kristine Harjes: So, going forward, are there any other treatment areas that we should be keeping an eye on?
Todd Campbell: They've got some interesting stuff going in the pipeline, absolutely. Michael, I don't know if you want to talk a little about the Galapagos deal that they did? They're also working on some treatment for NASH, which is another major cause of liver damage, and that could be, theoretically, at least a billion-dollar drug.
Who knows? You never know with these drugs that are in pipelines. But it's clear that they want to expand. They want to take some of this money that they're plowing back into R&D. They want to take some of their money that -- (laughs) their balance sheet has gotten so big! They have some much flexibility now.
Harjes: Yeah, it's insane. $26.2 billion in cash and other marketable securities. That's up from $11.7 billion at the end of 2014.
Michael Douglass: Yeah. And they were very clear that they were planning to pursue some partnerships, and, potentially acquisitions. Gilead has always been very, sort of, "Well, we're going to do something when the price is right and the drug is right and we feel like it," basically, which is something I actually really appreciate about them. It's another sign of management not chasing headlines. This is not management saying, "We're going to buy seven companies this year! We're going to buy 15 next year!" They're saying, "Hey, listen, we recognize the market's down. Maybe there's an opportunity, maybe there's not. We have all this cash, but we're going to make sure that we deliver the best shareholder value we possibly can for this cash." And that's something--
Campbell: On that front, Michael, just to jump right in here, I have a quote handy from John Milligan, who's going to be taking over in the top spot at Gilead very soon. In that conference call, he says: "I will continue to work hard to help Gilead's business grow beyond antivirals and into new therapeutic areas." And then, later on, he went on to say: "It's pretty clear that we have to do additional partnerships or find other avenues to broaden the revenue stream there for the future." And then later on, he even adds: "We're very interested in acquiring assets through partnerships, and with the tripling of our revenue over the last few years, the need to do so sooner rather than later is heightened."
Douglass: Yeah, and thanks to S&P Global Market Intelligence for that and any other quotes we mention.
Harjes: So, it's interesting that we're talking about buying other companies, and what are they going to do with all this money. Right now, it seems like Gilead's saying the best buy out there in the market right now is our own shares. This is a company that just added another $12 billion in share repurchase agreements after their existing $15 billion one is done, and of course, there's $8 billion left in that old one. $5 billion of this is going to be accelerated share repurchasing, so expect this to be completed sometime in this quarter. This is Gilead saying, "Hello, yeah, we're really cheap right now. We're a great buy. We think we're a great buy, you should think we're a great buy, we're buying up our own stock."
Douglass: Well, and what are they trading at right now?
Harjes: Based on 2015--
Campbell: Forward P/E is below 7.
Harjes: Below 7! That's crazy!
Campbell: (laughs) Below 7! To put that in perspective, AbbVie, which is a threat, potentially, to its top-selling drug, has a forward P/E ratio that's like 9.5.
Douglass: Yeah, and we looked at -- I mean, I only looked at Pfizer on a trailing, but theirs was like, 22, I think.
Harjes: Yeah. This is really, really low for any company in this industry, especially one that continually posts pretty remarkable growth. I will say, the one thing I think we're missing in this puzzle here, we haven't yet talked about the CEO news. So, recently -- actually, the same day as the Merck approval, I believe -- they announced that longtime CEO John Martin is going to be stepping down from the head position, and he's going to become executive chairman. Current president and COO John Milligan, who I believe we heard a quote from at some point during this episode, is going to become the new CEO on March 10th.
Campbell: This is a brilliant move. Too often do you not have transitions that are smooth and well-forecasted. This is the way to do it. You've got a guy who's been at the helm for 20-some odd years, handing it off to a guy who's been right by his side for 20+ years! This is the way to do it.
Douglass: Yeah, Milligan is definitely seen as Martin's right-hand man, and certainly, they'll appear at different conferences, and in reading through what they've said at those conferences, you can see them very much hewing to very similar philosophies. So, I think that, will Milligan be as good for the company as Martin has been? No one knows. But, I think that if you've liked Martin's leadership, and certainly we have, Milligan makes sense as the crown prince.
Kristine Harjes owns shares of Gilead Sciences. Michael Douglass owns shares of Gilead Sciences. Todd Campbell 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.