Gilead and the Curse of Cash

Posted on February 26, 2015 by David Laidlaw

>Gilead Sciences Inc. (GILD) has developed two break-through Hepatitis C drugs, Sovaldi and Harvoni, which cure the illness. Harvoni is especially effective since the treatment only involves a daily pill administered for 8 to 12 weeks. Gilead’s revenue has essentially doubled over the last 6 months due to the success of these drugs.

It is estimated the sales of these treatments will generate $30B over the next 2 years and $150B over the next 10 years. But at some point the revenue from the drug will dry up as the number of people with Hepatitis C falls. This is a great thing for society as a whole.  However, it provides a quandary for investors.

What will GILD do with all the cash? Most assume either a dividend or a large acquisition or both. The value of the cash generation is already included in the stock price- GILD has appreciated more than 50% since it first introduced Sovaldi at the end of 2013. Since the revenue from the company’s Hepatitis C drugs will peak in the next few years, a current investor in GILD is betting on management’s ability to invest the cash as much as it’s an investment in the drugs.

Investing the cash is easier said than done. Management could opt for a dividend, but that could hamstring them in the future if they want to make a large acquisition. The more likely scenario is an acquisition. GILD has a history of acquiring companies- in January 2012 it purchased Pharmasset for $11B. The market might be looking for an even bigger move.

Large acquisitions can cause a couple of problems. One is management could feel pressure to close a deal and therefore over pay. The other is that the market as a whole knows GILD has all this cash and is looking to invest. This demand drives up a potential candidate’s price. It also creates a scenario where any company viewed as a potential target stock would already be inflated before GILD even inquires.

Essentially, GILD has walked into a car dealership with $100,000 and screamed “I’m ready to buy!” So while it’s great to have cash, this isn’t always the best scenario under which to spend.