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Gilead Dithers While Stock Withers

By Jim Pearce on February 9, 2017

With the stock market near record highs and investors growing increasingly nervous about the Trump administration, companies that do not have a clear path to higher profits are getting hammered. Several retailers’ stocks got crushed in January after reporting weak holiday sales, and with no solid strategy to reverse their prospects.

The latest example is Gilead Sciences (NasdaqGS: GILD), which released its quarterly results after the market closed on Tuesday only to see its stock drop more than 10% Wednesday. Everyone knows what Gilead’s problem is: sales of its flagship drug for Hepatitis-C are declining, and it doesn’t have a way to makeup up the deficit. Clearly, Gilead has a problem.

The problem isn’t money, since Gilead has $30 billion in the bank. The problem also isn’t a lack of businesses to buy, since there are several small R&D firms in the rapidly growing cancer immunotherapy firms with promising treatments that are close to FDA approval. Gilead could buy a company like Argos Therapeutics (NasdaqGM: ARGS) with spare change. Argos has a market capitalization of only $210 million and has just broken ground on a production facility because it believes its cancer treatment is likely to gain FDA approval later this year.

But for reasons known only to them, the senior management team at Gilead has failed to act as its share price has dropped in half over the past eighteen months. Its board of directors is also complicit, since it can light a fire under the management team and replace them if need be. Instead, the press release accompanying the Gilead earnings report offered only this meek observation from the company’s CEO: “It makes it challenging for us to grow without an acquisition.”

An acquisition may be cheap for Gilead, but there are no sure things in the cancer immunotherapy business. It’s tough to predict what treatments will turn out to be the most effective, so it’s tough to know how much to pay for companies. But there’s also a cost to inaction, and that’s already cost Gilead shareholders billions of dollars in the value of their stock.

Not long ago, computer chip manufacturer Western Digital hit the skids as its share price dropped from a peak of $114 to a low of $35 in only eighteen months. Its aging product line was no longer capable of generating the income needed to support a high valuation. Sound familiar? Eventually the pain became too great, and Western Digital used its massive piggy bank to buy rival chipmaker SanDisk by what at the time was considered an outrageous premium.

At first analysts balked at the deal, afraid that Western Digital’s management team had panicked and paid whatever price was necessary to get the deal done. But within a few months its share price was on the rise after the company forecast higher revenue and earnings based on the strength of the SanDisk acquisition. Today, Western Digital trades near $80 and is once again considered a leader in the tech sector after being given up for dead only nine months ago.

That lesson should not be lost on Gilead’s management team. As the example of Western Digital proves, so long as you have enough cash then you can buy yourself back into the game. In this case Gilead needs to make a quick, bold move into the cancer immunotherapy field by acquiring one or more R&D firms with a promising product.

In an unforgiving stock market such as this one, the price of procrastination is too high.

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