Gilead Sciences - Shares Continue To Have Appeal, Trading At All-Time Highs

Dec.17.12 | About: Gilead Sciences, (GILD)

Shares of Gilead Sciences (GILD) ended an eventful week unchanged. The company announced a stock split and the acquisition of YM BioSciences in a matter of days.

Shareholder Returns

On Monday, Gilead Sciences announced that its Board of Directors have announced a two-for-one stock split. Stockholders of record on the 7th of January of 2013 will be entitled to another share. Shares of the company will be trading at their post-split price on January, 28th. As a result of the split, the number of shares outstanding will increase from 759.3 million to almost 1.52 billion shares.

This is not the first split in Gilead's corporate history. In 2007 and 2004 the company already split their shares, both times in a two-for-one ratio. In the further history of the company, Gilead announced a couple more splits.

Acquisition Of YM BioSciences

Two days later, on Wednesday, the company announced the acquisition of YM BioSciences (YMI). Gilead has signed a definitive agreement to acquire the company for $2.95 per share in cash. The offer represents a 78% premium compared to the closing price on the day before.

The deal values YM at $510 million US dollar. The deal will be funded with cash on hand. YM has a lead drug candidate, CYT387, which is an orally-administered, once-daily, selective inhibitor of the Janus kinase family. By acquiring YM, Gilead gains access to a possible treatment for a bone-marrow disorder.

Norbert W. Bischofberger who is Vice President of Research and Development and Chief Scientific Officer commented on the deal, "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. We look forward to advancing CYT387 into a Phase 3 study as quickly as possible and to exploring its potential in other myeloproliferative diseases with significant unmet medical needs."

YM ended its latest quarter with $125.5 million Canadian dollar in cash and equivalents and it operates without the assumption of debt. The $510 million dollar deal therefore values operating assets around $385 million. YM does not generate any meaningful revenues at the moment. During the past fiscal year the company reported revenues of $1.1 million Canadian dollar on which it lost $20.3 million Canadian dollar.

YM made great progress in advancing CYT387 during the clinical, regulatory, manufacturing and business development process. Gilead has the research and development capabilities and financial resources, to fully realize the potential of CYT387 as a therapeutic advance for myelofibrosis patients. CYT387 is expected to enter the third phase of testing in the second half of 2013.

The deal has been approved by the Board of Directors of YM. Gilead plans to close the deal in the first quarter of next year. The deal is furthermore subject to customary closing conditions.


Gilead Sciences ended its third quarter with $1.7 billion in cash, equivalents and marketable securities. The company operates with $8.8 billion in short and long term debt, for a net debt position of $7.1 billion.

For the first nine months of 2012, Gilead Sciences generated revenues of $7.1 billion. The company reported a net income of $1.8 billion, or $2.33 per diluted share. Gilead is on track to generate annual revenues of $9.6 billion. The company could earn roughly $2.5 billion for the year, or $3.15-$3.35 per share.

The market values Gilead Sciences at $56.2 billion at the moment. This values the firm at roughly 5.9 times annual revenues and 22-23 times annual earnings.

Gilead Sciences does not pay a dividend at the moment.

Some Historical Perspective

Year to date, shares of Gilead Sciences have risen an incredible 80%. Shares started the year around $40 per share and rose to highs of $75 in recent weeks. Shares are currently trading around $74 per share, within reach of all time highs.

Shares of Gilead traded as high as $57 in 2008 before falling back to low thirties in 2010. Shares have rallied some 150% from that point in time. Between 2008 and 2012, total revenues rose some 80% from $5.3 billion in 2008 to an expected $9.6 billion this year. Net income rose from $2.0 billion to an estimated $2.5 billion. Earnings per share rose even faster as the company retired roughly 17% of its shares outstanding.

Investment Thesis

Shares of Gilead Sciences have seen a great year so far. The company's HIV/AIDS therapeutics drug Stribild, or also known as the Quad Pill, is expected to boost growth in the coming years. Despite the fact that the disease is less prominent as it was a couple of decades ago, the market is expected to show continued growth in the coming years.

In August, Stribild has seen approval by the US Food and Drug Administration. While a treatment of the new drug is more expensive than Gilead's current offering Atripla, the strong efficiency of the drug will most likely make up for the higher costs.

At the same time the $11.2 billion acquisition of Pharmasset (VRUS) has been well received as well. By acquiring the company, Gilead has gained access to the hepatitis C market. Many commentators at the time argued the deal was risky, given that Gilead offered a 89% acquisition premium for a company without marketed products. At the time Pharmasset only employed 82 workers. The deal is a bet on establishing a dominant position in the fast growing hepatitis market.

The long term prospects for Gilead continue to look rosy. The deal to acquire YM Biosciences further increases the firm's pipeline. The medium term future of the company's HIV drugs seems to be secured by the introduction of Stribild earlier this year, while at the same time the hepatitis activities of the former Pharmasset continue to develop. Despite this outstanding pipeline, and after shares have rallied 80% so far this year, the company is valued at roughly 22 times earnings.

While shareholders have seen impressive returns so far this year, there might be a little more upside, given the strong pipeline. The strong future prospects might make the company even an acquisition target despite the $56 billion market capitalization. There are several large pharmaceutical and drug companies, with market capitalizations above $100 billion, which are struggling to generate future growth. A possible tie-up would not be the first time that the industry has been a multi-billion opportunistic deal.

I continue to see upside in the stock.

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.