Gilead Sciences (NASDAQ:GILD) is the target of a lot of speculation these days. The stock is undeniably cheap, with strong performance in its HIV portfolio unable to prop up the stock's sagging valuation as its Hepatitis C portfolio's sales come down to earth.
Whenever a company hits a speedbump, analysts seem to have lots of ideas for how management could right the ship. One that has come to the fore is the suggestion that Gilead should split, separating its HIV and Hepatitis C portfolios into two different companies.
It's a bad idea. Here's why.
Crossing disease types
The first question you have to ask when considering whether a company would split is: Who gets what in the divorce? And with Gilead, that answer is more complex than it seems. Let's start with drug portfolios. Dividing hepatitis and HIV sounds easy enough... but TAF, which is currently indicated for HIV, is also being studied to treat hepatitis B. Not so simple after all.
Dividing the non-hepatitis/HIV pipeline would be tough, too: If one company gets cancer, and the other gets autoimmune diseases, they'll have to do something special with GS-5745, which is being studied for gastric cancer and solid tumors in oncology -- and Crohn's disease and rheumatoid arthritis in the autoimmune space.
These aren't insurmountable problems, of course, but the key point is that Gilead's drugs have potential in a number of diseases, meaning that splitting the company would mean dividing its scientific expertise into arbitrary buckets that would reduce the knowledge base each scientist is working from.
Chief Scientific Officer Norbert Bischofberger is deeply familiar with this problem; he noted recently that: "We stopped research in Hepatitis C about 2 years ago. Many of those people now work on Hepatitis B cure. Our clinical group is very involved in liver disease, NASH in particular."
Balkanizing scientific efforts by dividing into two companies would be a disaster for Gilead's ability to push its pipeline further. But that's not the only reason the company shouldn't consider a split.
Gilead's management is tenured and has been working together for a long time. This management team has had a tremendous run of successfully creating shareholder value through organic and inorganic growth. The 2011 Pharmasset acquisition, which kicked off Gilead's hepatitis C run, was the crown jewel in what has been a string of successful acquisitions. The 2003 purchase of Triangle Pharmaceuticals provided emtricitabine, a crucial component in Gilead's market-dominating HIV cocktails that are currently on track to deliver over $11 billion in 2016 sales. Gilead's $1.4 billion 2009 buyout of CV Therapeutics landed it cardiovascular drug Ranexa, which is currently annualizing about $600 million in sales for 2016.
These and other drugs -- I'm thinking particularly about autoimmune drug filgotinib, which Gilead licensed for a fraction of what it could be worth -- highlight the fact that this is a management team that is very, very good at buying other companies and making sure the deal values out for shareholders.
It is rare to find a leadership group that has been this universally successful. This is not a team that should be split.
But if Gilead shouldn't split, what should it do instead?
Keep calm and carry on
There is nothing fundamentally wrong with Gilead's business. Yes, revenue has come down a bit -- and management is having trouble projecting exactly when hepatitis C drug sales will stabilize. But the company has a strong and diverse pipeline with multiple avenues to add another $10 billion in annual sales.
As if that wasn't enough, Gilead also has plenty of M&A optionality with $8.8 billion in cash and short-term investments on the balance sheet (and having just taken on another $5 billion in debt). Management has assured analysts several times that it is examining potential M&A targets. Given their track record, I'm all for giving management time to figure out its best path forward. In the meantime, splitting the company would be a big loss for Gilead shareholders over the long term.