Analysts at Barclays have had enough with Gilead and taken the unusual approach of writing an open letter to the Big Biotech to help it reshape and earn back lost value and confidence after 18 months of shares decline.
In the letter, analyst Geoff Meacham says: “I have followed your company for almost 12 years. Over that time, the valuation of Gilead shares has fluctuated greatly, marked by cycles of multiple contraction and one of dramatic expansion (post its Pharmasset hep C pipeline buy).
“For better or worse, investors have typically viewed Gilead fundamentals with a ‘boom or bust’ mentality, and prevailing sentiment looks skewed toward the latter. The purpose of this letter isn't to single out your company as one that has been mismanaged (it hasn’t); rather [to] help carve a roadmap to a re-rating.”
He says that there are a number of “letter worthy” situations across the biopharma sector, but Gilead “seems like the most important situation to us.”
This comes as the company had a string of trial setbacks last year across multiple indications, and its share value has been hit, hard. In 2016, its share price was eroded from a high of more than $100 a share to less than $72 by the end of December, sinking as low as $65 at one point in early February, coming after the release of its so-so financials.
Declining Hep C sales and setbacks in the clinic have meant that Gilead, in the near-term, will have to focus on its HIV meds and pipeline far more, but Barclays warns that, despite being sturdy in this area: “A strong HIV franchise alone isn’t likely to drive a re-rating.”
So, what should it do? Deals. “A potential deal by Gilead has been on investors’ minds for several years; at this point, we think almost any deal could be multiple expanding.”
But then again, the firm believes there should be a different approach, arguing that: “Gilead's typical deal parameters should evolve.”
Meacham says that the $464 million Triangle deal in 2002 and its $11 billion Pharmasset buyout in 2011 were among the best deals in the industry on ROI, but that it may have fallen victim to this success: “This is clearly an impossible benchmark. Other Gilead deals such as Myogen (2006) or CV Therapeutics (2009) look more ‘typical’ in that they took time to become NPV positive,” the firm notes.
“We think the outsized ROI from Pharmasset, the extraordinary launch, and the unexpected franchise deterioration all call for at least a deviation from Gilead’s typical deal parameters.”
Essentially, Barclays says Gilead should look to deals outside of the core areas of virology, oncology and inflammation.
It also wants to see deals that are more financial than strategic, or deals where value is added commercially; so not necessarily in phase 3 trials, but perhaps more for regulatory/manufacturing purposes.
Barclays has some advice on what deals it should be making: “We think that the orphan business model fits well within Gilead’s cost structure, adding that diversification outside anti-virals would help boost investor confidence.”
This specifically could include, the firm says, orphan areas such as aHUS (currently catered for by Alexion’s Soliris) or cystic fibrosis.
It also favors a deal “that is much more pipeline-driven,” would be well-received, but “also carry substantial clinical risk.”
But the firm thinks this trade-off would be worth it if there are “multiple mid-to-late-stage development opportunities,” and an “underlying business beyond the pipeline that could benefit from scale.”
“There are many companies that fall into this category including those with and IDO or PARP inhibitor [Tesaro and Clovis investors may perk up here], or a Hodgkin’s lymphoma franchise.”
It doesn’t, however, believe a merger of equals wither another biopharma would be worth the hassle, and also warns off buying a big I-O player, as this “seems less value-add to us.”
But time is running out: “Our fear is that as quarterly operating cash flow declines […] so does the capacity to do any meaningful transaction.”