Gilead Was Smart to Let Medivation Slip Through its Fingers
- By Sangara Narayanan
Gilead (GILD), Sanofi (SNY) and Pfizer (PFE) were some of the big-name pharma companies in the hunt for Medivation's blockbuster prostate cancer drug Xtandi that had approximately $2.2 billion in sales in the last four quarters. Gilead has been facing a lot of criticism for not being able to close the deal despite sitting on a $24 billion mountain of cash.
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The intrinsic value of GILD
The disappointment of Gilead investors is understandable. Gilead's balance sheet is as good as you see in the pharma world. At the end of the most recent quarter, Gilead had $6.485 billion cash on hand, $2.267 billion in short term securities and $15.864 billion in long-term marketable securities, a grand total of $24.616 billion to spend. With the company's long-term debt at $21.427 billion and last year's annual free cash flow hitting $19 billion, Gilead easily could have paid the $14 billion that Pfizer doled out to pop the Medivation pill.
But for all that, the "I would rather wait instead of paying top dollar" penny-pinching approach of Gilead must be appreciated. The pressure must have been enormous on the board to go as high as possible in the bidding war as Gilead's stock price keep plummeting to lower levels. It is the only big pharma company that is selling for less than seven times forward earnings.
Pfizer agreed to pay $81.50 per share for Medivation, a more than 50% premium from the $30 to $40 levels the company was trading in the early part of this year. With too many players in the mix Medivation's price went way over the top. Gilead did the right thing by backing out.
More often than not companies end up paying too much to buy other assets, but Gilead has always been careful in the acquisition game. Instead of paying $14 billion for a company that was worth $5 billion just a few months ago, it's better to wait and buy two companies for that price.
Incidentally, there are other analysts who agree.
"Gilead's history shows the company tends to make smart decisions when buying other companies. Many thought Gilead paid too much for Pharmasset back in 2011. However, that $11 billion purchase looks really smart now, since the acquisition led to Gilead's success with Sovaldi and Harvoni." - Motley Fool
On the hepatitis C front, Gilead took a hard hit when Sovaldi's 5% increase failed to compensate for Harvoni's 29% plunge during the second quarter. As a result share price fell nearly 20% year to date. This problem isn't going away soon, especially with Merck (MRK) now in the game with Zepatier, which is cheaper and known to be more effective. Gilead responded to the threat with discount offers, and that only added to its revenue slide.
Gilead's top line troubles are far from over as the competition keeps eating away at its sales. The stock is trading at rock-bottom prices and the only way to get out quickly is via acquisition. But paying too much just because you are not able to be patient is the easiest way to lose shareholder value, and Gilead has managed to avoid that potential land mine.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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This article first appeared on GuruFocus.
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The intrinsic value of GILD
