Fools know the value of a stock split: zero. It's a non-event. Instead of a $20 bill in your wallet, you now have two $10 bills. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:
- To make the stock look cheap.
- To increase liquidity.
- To meet stock-exchange listing requirements.
- To express a bullish management sentiment.
Regardless of the reason, markets tend to view splits as positive events, and a company's shares can get a short-term boost from the news. But if the company isn't a good, long-term business, it doesn't matter if its shares split, or whether you buy them before or after.
A split decision
As Gilead Sciences (NASDAQ: GILD ) closes in on its Jan. 7 two-for-one stock split date, the biotech finds itself 85% higher than where it started off a year ago, as great news followed good news and it becomes the must-watch player in hepatitis C, HIV, and AIDS treatment.
The global hepatitis market was estimated at around $5 billion in 2009, attracting pharmaceutical giants like Merck (NYSE: MRK ) , GlaxoSmithKline (NYSE: GSK ) , and Roche, but also a number of small players -- which were promptly bought out by their larger rivals.
Bristol-Myers Squibb's (NYSE: BMY ) purchased Inhibitex to get into the hep C market, Roche bought Anadys, and AbbVie (NYSE: ABBV ) -- the just-spun-off pharmaceutical division of Abbott Labs (NYSE: ABT ) -- is closing in with its own experimental hep C drug regimen that cured 99% of patients, but likely won't be a factor for several years yet.
Gilead itself bought Pharmassett and may now have the inside track to success with its drug GS-7977, which when combined with ribavirin, completely eliminated the hep C virus in genotype 1 patients after four weeks.
Four times as good
This past summer, the biotech also won approval from the Food and Drug Administration for HIV drug cocktail Stribild that will be for patients who have never been previously treated for HIV infection. It's called "the Quad" for the combination of four drugs it uses, and analysts estimate it could generate as much as $4 billion annually for Gilead because it helps simplify a patient's drug regimen. HIV sufferers will only need to take Stribild once a day, but at $28,500 a year (before discounts), it's a pricey prescription -- one that's attracted the ire of some HIV and AIDS prevention advocacy groups.
Stribild is a combination therapy composed of four drugs: elvitegravir, cobicistat, emtricitabine, and tenofovir. It will join another HIV therapy, Atripla, a three-drug cocktail that includes Bristol-Myers' drug Sustiva, which generated almost $2.7 billion in sales over the first nine months of 2012. Truvada made $2.3 billion, while Viread, Gilead's first HIV treatment introduced back in 2001, contributed more than half a billion dollars.
Truvada will probably get a big boost in the years to come as the FDA also approved it as an AIDS prevention treatment in July; it was found to be 73% effective for men who took it regularly. But the same advocacy groups against Gilead's Stribild pricing also opposed using Truvada as a preventative measure instead of condom usage.
Covering all the bases
For Gilead, however, this portfolio of effective outcomes will lead the company forward and its stock higher. At $75 a share, the biotech trades at 23 times earnings and 17 times estimates, giving it a slight premium to other biotechs like Amgen (NASDAQ: AMGN ) and Celgene (NASDAQ: CELG ) . With an enterprise value that goes off at almost 20 times the free cash flow it generates, it's true that Gilead Sciences isn't a bargain basement stock, but I suspect that as these drugs hit the market and pad its bottom line, we'll see those valuations ease making it a worthy investment.
I'm rating the biotech to outperform the broad market indexes on Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings of one to five stars. But let me know in the comments box below if you think Gilead Sciences has it in its genes to continue its growth trajectory after it splits its shares.
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Editor's note: In a previous version of this article, Stribild was incorrectly referred to as a combination of Truvada and Sustiva. The Fool regrets the error.