Tickers in this Article: GILD, VRUS, HGSI, SGEN, INCY, ALXN, TRGT
When you see a person or company referred to as a "one-trick pony", it is supposed to be an insult, or at least a serious criticism. But what if that one trick is really, really good?

That is the dilemma for investors considering adding shares of Gilead Sciences (Nasdaq: GILD) to their portfolios. Gilead has one of the best HIV portfolios in the world, and that contributes about 77% of the company's revenue. But can this company continue to grow and attract institutional investors with just one stellar business?

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Not Too Many Comparables
If you look around at the large-cap biotech companies and pharmaceutical companies that are Gilead's most logical peers, you notice something important - none of those other companies are quite as dependent on a single disease. Amgen built itself with a focus on hematology, but it has since expanded into cancer, osteoporosis and inflammatory disease. Genzyme has a broad focus on rare diseases, Biogen Idec is diversified across several categories, and though Celgene is focused keenly on cancer, different types of cancer are often treated like completely different diseases.

A Narrow Pipeline
If you look past Gilead's current approved drugs, you see a pipeline slightly more diversified but still heavily focused on virology. True, drugs are being developed for treating pulmonary fibrosis, cystic fibrosis and pulmonary hypertension, but a lot more drugs are targeting HIV/AIDS and Hepatitis C. (For related reading, see Measuring The Medicine Makers.)

Should Past Deals Be A Warning?
Given Gilead's current expertise, I do not believe the company has the clinical wherewithal to develop new compounds outside its current areas of focus in virology and cardiopulmonary disease. Simply put, it just is not practical to go to your scientists, plunk down a stack of journals and tell them, "Okay, you are specialists in autoimmune disease, give us some compounds to test."

So, that means that Gilead will need to do deals to grow beyond virology. Looking back, though, Gilead's acquisition history is a mixed bag. While acquiring Triangle Pharmaceuticals in 2003 was extremely successful (giving Gilead the drug Emtriva), other acquisitions like Nexstar, Corus, Myogen and CV Therapeutics are not such immediately obvious successes. That said, none of these deals has really failed (Myogen simply looks like it will be very expensive).

Who Might Gilead Consider?
So, what sorts of deals would make sense for Gilead? Pharmasset (Nasdaq: VRUS) would offer new options in Hepatitis C, but investors may not be excited by more virology even if there is a broader infectious-disease selling point. Human Genome Sciences (Nasdaq: HGSI) or Seattle Genetics (Nasdaq: SGEN) would offer expansion into antibodies and new disease categories like autoimmune and cancer. Incyte (Nasdaq: INCY) would be an entryway to oncology, autoimmune and metabolic disorders, while Alexion (Nasdaq: ALXN) would offer ultra-profitable orphan drug indications, but likely little in the way of broader science opportunities. Last and not least, what about a company like Targacept (Nasdaq: TRGT) and its relatively deep pipeline of neurological and psychiatric compounds?

The Bottom Line
By my models, Gilead is worth at least $50 a share today, but that valuation is absolutely predicated on the company continuing to post lucrative, cash-rich growth. That, in turn, would seem to require that it begin to broaden its horizons a bit. Consequently, I think investors should expect Gilead to be an active shopper among its smaller brethren. (For related reading, check out Trademarks Of A Takeover Target.)

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