Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Incoming Gilead CEO John Milligan has an M&A shopping list in his head, he said on the biotech's earnings call on Tuesday. Investors would love to see that list turn into something a little more tangible.

Take Your Pick
Investors liked something in Gilead's earnings announcement Tuesday, which included a fourth quarter beat, M&A speculation, and a big buyback announcement.
Intraday times are displayed in ET.

The company rode its last big acquisition, Pharmasset in 2011, to a blockbuster Hepatitis C (HCV) franchise and a $90 billion increase in market cap over three years. The deal made Gilead the world's most valuable biotech. But the company mostly sat out last year's health-care deal boom. And as HCV sales slow, investors are increasingly focused on what comes next. 

Milligan, the current COO who will take over the CEO job in March, was more candid about what's on his M&A mind on Tuesday than Gilead executives have been in the past. He said the company has to move beyond its traditional strength, antiviral medicines for HIV and HCV, in order to grow. Gilead seems to be looking most closely at cancer drugs, inflammation drugs, and liver disease.

Gilead committed a lot of cash to buybacks on Tuesday -- $12 billion on top of the $15 billion it announced last year -- which may delay or reduce the size of a potential deal. But it also left the door open to cutting back on repurchases to prioritize an acquisition. 

Milligan said the fact that Gilead has tripled its revenues in just three years creates a heightened need to do a deal "sooner rather than later." Sales growth has been extraordinary -- driven by its HCV drugs Sovaldi and Harvoni -- but it peaked rapidly. 

The Great Gilead Slowdown
Gilead's total sales grew more than 100% in past quarters after its HCV drugs were introduced.
Source: Bloomberg

The company's HIV sales are growing, but can't make up for HCV deceleration in the essential U.S. market, driven by a finite patient population and increased competition from Merck.  

The company forecast 2016 sales of $30 billion to $31 billion -- a decline from 2015 and below analyst expectations. Flat sales mean Gilead trades at 6.9 times forward earnings estimates. That's the lowest premium of its big biotech peers -- which average a multiple of 12.9. 

In contrast, the most richly valued of Gilead's peers is Celgene, which has been on a deal frenzy of late. Since Gilead's Pharmasset deal in 2011, Celgene has done more than 20 acquisitions and partnerships, worth more than $8 billion, giving it a large and diverse pipeline. Investors have driven up its stock price, and it now trades at 16.5 forward earnings. 

This year's dive in biotech stocks makes potential merger targets cheaper and more attractive. And Gilead has $26 billion in cash and equivalents burning a hole in its pocket.

Fruits of the Rout
A big decline in biotech stocks has made some oft-mentioned potential Gilead targets cheaper
Source: Bloomberg

Some of the companies listed in the chart above are outside of Gilead's areas of focus, including cystic fibrosis drugmaker Vertex and rare-disease-focused BioMarin. But others, such as liver drug developer Intercept and oncology drugmaker Incyte, are arguably good fits. And there's a whole universe of hard-hit early stage companies out there if Gilead wants to focus on its long-term pipeline. 

There are consequences to Gilead's waiting.

The company missed out on buying Pharmacyclics last year, losing it to AbbVie. It lost Acerta to AstraZeneca. Both could have yielded promising blood cancer drugs. Other companies, including Merck, Johnson & Johnson, Roche, and Amgen, are very much on the hunt in this market, possibly for similar assets. Gilead is admittedly behind in hot and crowded areas, such as drugs that use the immune system to fight cancer. The longer it waits, the more likely it will be chasing treatments instead of leading with them. 

The idea of trying to recapture the magic of the Pharmasset deal -- an $11 billion acquisition that has already led to more than $31 billion in sales -- must seem daunting. But if Gilead does nothing but buy back stock, then it may slowly lose its hard-won position as the biggest biotech.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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