Gilead Sciences: Nice Cash Flow, But What's in the Pipe?

| About: Gilead Sciences, (GILD)

Despite Gilead Sciences’ (NASDAQ:GILD) lucrative franchise as a leading provider of HIV-fighting drugs, its stock has weakened over the past nine months — even as the biotech company spent $3.9 billion buying back a full ten percent of its outstanding shares.

The problem? Looks like another case of maturing high-flier syndrome: As its earlier galloping growth begins to slow, investors are starting to wonder what Gilead plans to do for a second act.

YCharts Pro, which tends to focus on a company’s fundamental metrics and relative valuations, has a “Neutral” rating on the Foster City, Calif. maker of antiviral products. But Gilead’s made a couple of questionable acquisitions in recent years as it tries to move into new markets. And its future – even if it doesn’t get nervous and make another high-premium acquisition — includes enough question marks to make the stock look unappealing to anyone but long-shot players.

Formed in the 1980s and public since the early 1990s, Gilead didn’t turn an annual profit until 2002. As AIDS/HIV increasingly became seen as a treatable, chronic, condition, the company’s once-modest growth soared. In recent years, its fastest-growing product has been a once-a-day HIV drug that combines a Gilead-produced medicine with one made by Bristol-Myers Squibb (NYSE:BMY), in an all-in-one treatment that represents a big advantage over the cocktail of individual drugs AIDS patients once were obliged to swallow.

Since that product got U.S. regulators’ approval in mid-2006, Gilead’s earnings have moved higher.

And free cash flow has flowered.

Gilead’s portfolio of anti-HIV medicines will remain under patent protection for several more years and, given the continued global increase in new HIV cases, that area promises to remain a high-growth field. Still, Gilead, like rivals such as Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE) and Merck (NYSE:MRK), is scrambling to develop new drugs in-house, while also acquiring smaller companies that own promising pipelines.

Given the cost and difficulty pharmaceutical makers routinely encounter as they seek the Next Big Molecule, it’s not surprising that Gilead’s efforts to broaden its portfolio have had mixed results. The company paid about $2.5 billion four years ago to buy Myogen, a maker of cardiovascular drugs, and that pricey deal hasn’t yielded the hoped-for benefits. And the company doubled down its bet on cardio products last year, when it paid $1.4 billion to acquire angina-drug maker CV Therapeutics.

Luckily, the cash continues to pile up: cash and equivalents stood at $5.05 billion at the end of the September quarter, up from $3.9 billion at the close of 2009. That’s even more remarkable, since the company has been busily buying back shares under a combined $6 billion in repurchases authorized over less than a year. The company pays no dividend. It calls the ongoing buyback effort its “preferred vehicle for returning value to shareholders.”

Gilead’s shares held up pretty well as the stock market began to tank in late 2008. It wasn’t until early 2010 – as healthcare-reform legislation, with its potential for profit-squeezing changes – that the shares swooned. Because government entities are big purchasers of Gilead’s anti-HIV medicines, future pricing pushbacks seem likely.

Taken together, such worries have put pressure on Gilead’s market cap.

Being cheaper made the company the subject of rumors it could be a buyout candidate for an even bigger drug maker looking to fill a dwindling pipeline. Takeover talk is cheap. But given the company’s slowing growth, Gilead’s shares probably aren’t cheap enough.

Disclosure: No position