Can't Get No Respect: Why Investors Punished Gilead for a Drug That Halts HIV
Gilead (GILD) CEO John C. Martin must be tearing his hair out: the stock market only seems to punish his company despite a stream of good news. Gilead just announced that one of its drugs, Truvada, can substantially prevent HIV infection in gay men. Its Q3 2010 revenues climbed 13 percent to $1.8 billion. It has a hepatitis C suppressant moving nicely through its pipeline. It gets $7.69 in revenues for every dollar it expends on sales reps and marketing -- about double the industry average. And it has two more HIV combo pills coming down the pike, giving patients and their doctors yet another set of treatment options. If this were any other company, investors would be jumping for joy. Instead, the stock is in a nose dive:
It's become fashionable to complain about Gilead. Here's a Forbes column demanding to know what Gilead's "second act" is going to be. (The company just prevented AIDS in 44 percent of at-risk patients! What more do you want?)
Truth be told, there are reasons for concern. Gilead made two acquisitions that are turning out to be mistakes. In 2009, Gilead paid paid $1.4 billion for CV Therapeutics to acquire the chronic angina drug Ranexa. In 2006, it bought Myogen for $2.5 billion to acquire the pulmonary disease drug Letairis. In the last quarter, those drugs earned only about $60 million each in revenues. That means it will be about eight years before those drugs earn back their purchase price in revenues, and years after that before they turn a profit. Those low revenues are slowly crippling Gilead's famous operating leverage. Here's a chart showing, quarter by quarter, how much Gilead gets back in revenues for every dollar it spends on sales and marketing:
Clearly, the Gilead miracle is over: It can't get its sales efficiency to go above $8 and may be in danger of drifting backward. Its HIV patent portfolio is in no immediate danger of expiring but the company does, in fact, need a dramatic new product -- preferably within its antiretroviral expertise -- to give it a new story to tell about its future. Absent that, the declining stock price suggests it may become an acquisition target.
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