Gilead: What New CEO Brings-and Doesn't--to the Table

We're not making any changes to our $86 per share fair value estimate for

Gilead GILD or CHF 333/$42 fair value estimates for

Roche RHHBY following the announcement that the CEO of Roche's pharmaceutical division, Daniel O'Day, will leave Roche at the end of 2018 and become chairman and CEO at Gilead effective March 1, 2019. O'Day will be replaced by Bill Anderson, who is currently CEO of Roche's Genentech. Anderson has been at Roche since 2006 and has a background in engineering as well as experience leading an immunology business unit and Roche's global product strategy. We are lowering our stewardship rating for Gilead from Exemplary to Standard as we await details on any changes to strategy or performance. Previously, we have applauded Gilead's moat-building investment strategies, good allocation of capital, and superior board independence and qualifications.

Gilead's 2018 was a year of massive management turnover, and while we think the hiring of O'Day adds stability, we're concerned that the firm might still lack the scientific expertise needed to guide accretive mergers or acquisitions, given O'Day's marketing background. Significant turnover gives the firm the opportunity for a fresh management team to enter at a time when massive revenue headwinds from the HCV franchise are abating, but we feel it is too early to assume they can live up to the prior Martin/Milligan team's track record. We see blood cancer and immunology as key areas of future growth for Gilead, which both fit well with O'Day's experience at Roche. However, Gilead's current reliance on its core HIV portfolio for growth puts pressure on both pipeline advancement and M&A. While O'Day has been at Roche for 31 years and has been CEO of Roche's pharmaceutical division since the departure of Pascal Soriot in 2012, our window into O'Day's ability to make good deals is limited (including the $8 billion acquisition of Intermune and the mildly disappointing oral IPF drug Esbriet).

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