2 Healthy Companies Carrying Cash Heavy Balance Sheets

Both Gilead Sciences (NASDAQ:GILD) and Forest Labs (NYSE:FRX) have large cash balances, little trouble meeting their short-term liabilities, and face some interesting challenges in the near term.  Are they potential acquisition targets for other drug companies?

Following is some information on each of these companies.

Gilead Sciences (NASDAQ:GILD):

Gilead Sciences has underperformed the S&P 500 (NYSE:SPY) over the past 52 weeks.  It has returned 2.29%, compared to the S&P 500’s return of 13.22%.  Its 52-week range is $31.73 to $42.93, and the stock most recently traded at $40.90, up $0.23 on the day.  On strict valuation measures, the company is underpriced relative to the broader market: its forward price-to-earnings ratio is 8.99 and its 5-year expected price-to-earnings growth ratio is only 0.65.  Its price-to-sales ratio is 4.13 and its price-to-book ratio is 5.21.  Last year it generated $9.39 in revenue per share, for total revenues of $7 billion (there are 791 million shares outstanding).

Its low valuation can be ascribed to its growth numbers: quarterly revenue growth is negative, at -7.7%, as is quarterly earnings growth, at -23.8%.  Nonetheless, it has $6 billion in cash on its balance sheet, against total debt of $4 billion, and its current ratio is a comfortably high 3.42.  Book value per share is $7.80, and cash per share is $8.03.

The stock is not highly correlated with the overall market, as its beta is 0.38.  The stock is trading right at its 50-day moving average of $40.94, and it is slightly above its 200-day moving average of $38.93.  18.8 million shares are sold short, or approximately 2.2 days trading on average.  Average daily volume is 12.2 million shares.  Last month, 19.4 million shares were held short.

Despite growth problems, the stock is trading near its 52-week high, the balance sheet is flush with cash, the company will have no problems covering its short-term debts, and the stock is attractively valued.

About the company: Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops, and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases.  The Company’s primary areas of focus include HIV/AIDS, liver disease, and serious cardiovascular and respiratory conditions.

Forest Labs (NYSE:FRX):

Forest Labs, which is facing patent expiration on its popular depression drug Lexapro in early 2012, is another cash-rich, well-priced pharmaceutical company.  The shares have out-performed the S&P 500 (NYSE:SPY), increasing by 28% compared to the S&P 500’s 13.2% return over 52 weeks.  The shares have traded in a 52-wee range of #24.17 to $35.15, most recently trading at $34.43.  Their 50-day moving average is $32.48 and their 200-day moving average is $32.59, so for the technically-oriented, the current price seems somewhat attractive.

From a fundamental value perspective, the stock is an interesting one.  Its forward price-to-earnings ratio is a pricey 28.46, but it trades at price-to-sales ratio of 2.26 and a price-to-book ratio of only 1.94.  The company generated revenue of $15.08 per share, for total revenue of $4.39 billion last year.  Quarterly revenue growth was 7.8%, and quarterly earnings growth was an absurd and unsustainable 1,327.4%.  Diligent investors should look at the companies footnotes to determine what caused the large spike in quarterly earnings growth.

More interestingly, its balance sheet is pristine.  The company holds 0 debt, and $3.7 billion in total cash, or $13.05 cash per share.

8.11 million shares are sold short, as compared to 8.12 million in the previous month, and the short ratio is 3.2.

About the company: Forest Laboratories, Inc. develops, manufactures, and sells both branded and generic forms of ethical products which require a physician’s prescription.  The Company also manufactures non-prescription pharmaceutical products sold over-the-counter, which are used for the treatment of a wide range of illnesses.  Forest’s products are marketed in the United States and eastern Europe.

Other companies that operate in this industry include: Sanofi-Aventis SA (NYSE:SNY), AstraZeneca plc (NYSE:AZN), Novo Nordisk A/S (NYSE:NVO), Amgen, Inc. (NASDAQ:AMGN), Bristol Myers Squibb Co. (NYSE:BMY), Teva Pharmaceutical Industries Ltd. (NASDAQ:TEVA), and Celgene Corporation (NASDAQ:CELG).

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