Biopharma CEOs are accustomed to fielding the occasional tough question from Wall Street analysts during earnings conference calls, but Gilead CEO John Milligan was still caught off guard by one query Tuesday night, after Gilead rolled out disappointing 2017 guidance.
Mark Schoenebaum of Evercore ISI asked Milligan to ponder the $30 billion in revenues Gilead reaped in 2016 and then consider this: “[C]ould you grow the company without an acquisition?”
It was far from the first time Milligan had faced questions about M&A and its importance for future growth. With sales of its game-changing hepatitis C drugs, Sovaldi and Harvoni, slipping 32% and 34% respectively during the year, investors have been pressuring Gilead to do something big to inject new innovation into the pipeline. But Schoenebaum asked Milligan to think about that $30 billion haul as a starting point and “just riff on it.”
Milligan riffed, starting with the one big challenge that largely explains why Gilead’s stock has lost 40% of its value over the last 18 months: “We don't have a lot of things launching over the next few years,” he said. On top of that, Gilead is facing patent losses on several products, including Letairis to treat pulmonary arterial hypertension and angina drug Ranexa. And “that makes it challenging for us to grow without some sort of acquisition,” he said.
It’s not that Gilead had a bad quarter—on the contrary, fourth-quarter product sales of $7.2 billion and net income of $3.6 billion beat consensus estimates. What disturbed investors was how badly Gilead expects to fall short of expectations for 2017. Gilead told investors to expect product sales to come in between $22.5 billion and $24.5 billion. Analysts had been hoping for $27.7 billion.
The guidance was so bad Piper analyst Joshua Schimmer issued a note after the call declaring: “It stinks—but if you hold your nose, it's not that bad.”
Schimmer is hopeful Gilead’s HIV franchise will help make up for losses on the hepatitis side of the business. He pointed out that future growth could come from new product entries like Genvoya, a single-tablet treatment known as a TAF-based regimen. The product surpassed $1 billion in sales in its first year and was the most widely prescribed HIV drug in the U.S., according to Gilead. That helped drive antiviral product sales up 27% in 2016 to $9.1 billion.
In the long term, Gilead is betting it can be a major player in the hot market for drugs to treat nonalcoholic liver disease (NASH). The company bolstered its presence in the NASH market last year with two acquisitions and a $1.2 billion licensing deal.
Still, many analysts reported feeling bearish after the earnings call. Schimmer slashed his 2017 earnings-per-share estimate from $10.74 to $8.08. (EPS was $11.57 in 2016.) He declared the stock a “deep value” play, warning it would take years for Gilead to chart organic growth unless it buys “something strategic” to “accelerate that process.”
That brings us back to the M&A question. During the earnings call, Milligan said Gilead is out looking for acquisitions that “are the right strategic fit with our company.” When pressed for details, he would only say that the point of pursuing a deal wouldn’t be to drive cash flow in the short term but rather to boost the pipeline.
Gilead’s troubles have some investors thinking of the company more like an automaker than an innovator of cutting-edge medicines. Indeed, value investors have been looking at the company’s slowing growth and low price-to-earnings ratio and piling in, hoping a sales and earnings boost will come eventually. And with shares down nearly 7% to $68.20 in pre-market trading Wednesday, Gilead may look even more enticing to value investors who can afford to be patient.