On November 21 this year, that is yesterday, Gilead Sciences, signed a definitive agreement to acquire Pharmasset for $11 billion. And this is in $134 per share in cash. Before November 18, the price was hovering around $72 per share. And on the announcement day, it shoot up to over $134 per share, a hike of around 83.99%. Wow! The management at Gilead Sciences agreed to pay around 86% premium over the prevalent stock price of Pharmasset. But why?
Gilead Sciences mostly creates medical products for the life-threatening, serious, global diseases, especially HIV. And not to go into complicated medical stuff, Pharmasset is into treating Hepatitis C viral infection. Now, if they find the cure, then Gilead Sciences is going to make billions of dollars in revenue alone. But what if they can't? It's definitely a risky investment. I would guess, Gilead Sciences was thinking about the same for quite some time. In March this year, it already raised around $1 billion with the issuance of senior unsecured notes at the annual interest rate of 4.5%.
But even before we decide if Pharmasset was the right company to go for, we have to first figure out whether making any such investment was viable for the company now.
Looking at the third quarter report, the company's total revenues went up to $2.12 billion, up by 9% over that in third quarter previous year. Anti-viral product sales went up to $1.79 billion, up by 9% over the same quarter year ago. And by the end of September, the company had around $5.48 billion in cash and cash equivalents. Now, when the sales of other viral products are going up, you have enough cash in hand and you see a good ray of prospect in another company's medical findings, what do you do? You buy that company. You take that risk!
And that's what Gilead Sciences did.
Even in the financial highlights, I am pretty much satisfied with the performance of the company. The sales has been rising CONTINUOUSLY for the past five years, even during the recession period. Even operating income rose to $3.96 billion in 2010, gradually from $2.16 billion in 2007. The company's return on average equity (ROAE) of 47.44% is much better than 20.23% of Bristol Myers, 1.51% of Merck & Co. and 24.88% of Johnson & Johnson.
One thing must be noted. The company's investments and cash assets have been undulating alternately during the last five years. When the cash assets increased, nothing was invested in. When the cash assets decreased, we knew the company was investing in something. And it all turned out to be pretty good. So, it might be this time as well.
I am counting on the company, and I believe the management had sufficient reasons to think Pharmasset was a good investment.
"The acquisition of Pharmasset represents an important and exciting opportunity to accelerate Gilead's effort to change the treatment paradigm for HCV-infected patients by developing all-oral regimens for the treatment of the disease regardless of viral genotype," said John C. Martin, PhD, Chairman and Chief Executive Officer of Gilead. "Pharmasset presented compelling Phase 2 data earlier this month further characterizing the strong efficacy and safety profile of PSI-7977. The compound, together with Pharmasset's other pipeline candidates, represents a strong strategic fit with Gilead's vision, pipeline and capabilities. This transaction will serve to drive the long-term growth of our business, and we look forward to working closely with the Pharmasset team to advance a broad clinical program in HCV to address the unmet needs of patients and the medical community."
I don't have anything negative to say yet about the company. Let's just wait and watch.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.