Gilead Sciences' Stock Dividend And What's Behind It

| About: Gilead Sciences, (GILD)

Stock dividend

Gilead Sciences (NASDAQ:GILD) pays no cash dividend and has no intention doing so in the near future.

But in January 2013 it will pay a stock dividend.

The Board of Directors has approved a two-for-one stock split of the company's outstanding common stock to be effected through a stock dividend.

Stockholders of record on January 7, 2013, will receive one additional share of common stock for every share they own, as a stock dividend.

Based on the total number of shares of common stock outstanding as of November 30, 2012, the stock split will increase the total number of shares outstanding from approximately 759,335,932 to 1,518,671,864.

Since only the number of shares outstanding change, there is no change in the company's equity, or its market capitalization.

Also, each stockholder's proportionate ownership interest in the Company will remain unchanged.

The overall market value of the stockholder's investment remains the same, since the price of each share immediately post-split will be approximately one-half the pre-split share price, until the stock price moves up or down.

The Company was not required to obtain stockholder approval because the split is in the form of a stock dividend and the number of shares outstanding after the split will be below the maximum number of shares authorized by the stockholders (2.8 billion shares).

The stock split has been approved by Gilead's Board of Directors.

There is no charge for the additional shares and no tax to be paid on the transaction either.

The tax basis of each share owned immediately before the stock split will be apportioned equally between the historic share and the newly received share following the stock split.

For example, if a person owned 100 shares of the Company's common stock before the stock split with a cost basis of $50 per share, after the stock split, he/she will own 200 shares with a cost basis of $25 per share.

The company's stock will begin trading at the post-split price on January 28, 2013. Any shares purchased after January 7, 2013 through January 28, 2013 will come with a "due-bill" entitling the buyer to one additional share for each share purchased.

Why doing it?

The basic reason for doing a stock split is to increase trading liquidity: lower share price attracts a larger class of investors, so the trading volume will increase and the share price can rise again.

Gilead has a tradition of stock splits. This is the fifth time the Company has split its stock. The other stock splits occurred in February 2001, February 2002, September 2004 and June 2007.

Gilead's share price has been on the uptrend all year and it is currently hovering around its 52-week high of $76.28, reached on November 23, 2012.

It is likely that the soaring stock price necessitated the 2-for-1 stock split.

Investor's summary

It has been a good year for Gilead.

The share price was driven by multiple catalysts, including the risky but so far successful purchase of Pharmasset, targeting the lucrative hepatitis C virus market and the approval of the high potential HIV therapy, Stribild.

The attraction of Stribild is that relative to the combination therapy Atripla, which is already on the market and uses a combination of drugs from Bristol-Myers Squibb (NYSE:BMY) and Johnson & Johnson (NYSE:JNJ) Stribild's four components are made completely in-house. That means no revenue sharing and more profits for Gilead, provided they can sell it to new patients.

In November 2012 Gilead unveiled impressive data during the American Association for the Study of Liver Diseases meeting from a Phase 2 study, testing two experimental pills, the nucleoside, or "nuc" polymerase inhibitor sofosbuvir and GS-5885. Gilead's HCV candidate sofosbuvir, which was added to Gilead's pipeline through its acquisition of Pharmasset, is now in a phase 3 study.

The results put Gilead in the lead in what has become a two-horse race with Abbott Laboratories (NYSE:ABT) to produce the first treatment for the disease that doesn't include interferon with its pretty tough side effects.

In the third quarter Gilead sales increased 14 percent to $2.36 billion compared to $2.07 billion for the third quarter of 2011.

In December Gilead Sciences bought YM BioSciences (YMI), a Canadian company, for $510 Million cash, mainly to get access to the Canadian company's research into treatments for a bone-marrow disorder.

YM BioSciences investors will receive $2.95 a share, an 81 percent premium over the recent price for U.S. shares of YM BioSciences.

The Canadian company's lead drug candidate, CYT387, is an orally-administered, once-daily, selective inhibitor of the Janus kinase (JAK) family, specifically JAK1 and JAK2.

The drug combats myelofibrosis, a bone-marrow disease that can lead to anemia and an enlarged spleen.

The JAK enzymes have been implicated in a number of disorders including myeloproliferative diseases, inflammatory disorders and certain cancers.

The acquisition provides Gilead "with a promising asset at a very reasonable price," said Brian Abrahams, an analyst with Wells Fargo Securities.

YM BioSciences has been slow to jump into a late-stage trial for its lead candidate CYT387 and Gilead might speed up the process.

Gilead also brings some experience in myelofibrosis, one of the conditions targeted in a Phase 2 program for its antibody candidate simtuzumab with a different mechanisms of action.

"Based on promising Phase 2 data, we believe CYT387 could provide important clinical benefit for patients with myelofibrosis, including potential improvements with regard to anemia and decreased dependence on blood transfusions," said Norbert W. Bischofberger, Gilead's Chief Scientific Officer.

Potential rivals in the field are Incyte and Novartis' (NYSE:NVS) JAK inhibitor Jakafi, which the FDA approved last year to combat myelofibrosis. And Cell Therapeutics (NASDAQ:CTIC) has its own midstage program focusing on the blood disease.

Gilead Sciences is a smart and aggressive company with further upside on the horizon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.