We all know that the major pharmaceutical companies are struggling. Traditionally, shares of the big pharmaceutical companies are seen as a safe haven because of their consistent earnings and dividend payments.
This time around names such as Pfizer (PFE) and Merck (MRK), two of the stalwarts of the industry, languish near their multi-year lows. Patent expirations and a dry pipeline of new drugs are to blame.
It is a risky business as the cost to bring new drugs to market is exorbitant. As such, some drug companies are looking at mergers and acquisition to refill pipelines.
Potential Acquisition
With $26 billion in cash on its balance sheet, PFE is well-positioned to make an acquisition. One name supposedly in the crosshairs is Gilead Sciences Inc. (GILD).
Gilead is a biotechnology firm that specializes in developing and commercializing medicines in areas of unmet need. Primary areas of focus include antivirals (for HIV/AIDS and chronic hepatitis), cardiovascular conditions (such as pulmonary arterial hypertension and resistant hypertension) and respiratory diseases (such as influenza and cystic fibrosis).
In all, Gilead has 11 marketed products and 2007 revenue surpassed $4 billion. The company has several drugs in phase III trials and one awaiting FDA action.
Gilead is a world-class company to be sure. It also carries with it a world-class valuation. It’s very reminiscent of when the big pharma players were in their heyday, meaning that world-class valuation appears to be justified.
For its quarter ending Sept. 30, 2008, GILD reported a 30 percent year-over-year increase in revenue and a 24 percent increase in non-GAAP net income. In addition the company announced a $750 million accelerated share repurchase program.
Like many companies Gilead’s shares saw their highs for last year in mid-August and then quickly the bottom fell out. They’ve since recovered about half of what was lost during the “sell anything and everything period.” That was probably the best time for any acquisition proposal to be made, but hindsight is always 20/20.
Shares today are a bit pricey. Its P/E ratio of 20 for expected 2009 earnings isn’t out of line with its expected earnings growth, and revenue growth is expected to be similarly high.
Given the pressure on big pharma, a blow out bid for GILD is not out of the question. That said, if you buy now you are speculating on an acquisition. One thing for certain is to consider buying shares on any dips in value.
Navellier’s PortfolioGrader rates GILD an A or strong buy. I can’t say I disagree.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com. James F. Dlugosch contributed to this article.
