Stock quotes in this article: abbv, celg, amgn, biib, gild
A note from RBC Capital Thursday on Gilead Sciences (GILD) , which some are calling a "trial balloon," got a lot of chatter and, judging by the pickup in some of the drugmaker's call volume Thursday, the chatter may not be idle.
RBC Capital suggested the drugmaker would be better off cutting its businesses right down the middle, and shares are likely to jump by as much as about 40% if management makes the cut, analysts with RBC Capital said in an investment note.
This article has been updated on Thursday, August 18, to reflect commentary from Jim Cramer on recent increases in volume on Gilead call options.
Is Gilead Sciences (GILD) going to take the knife to itself?
A recent note from RBC Capital on Gilead, which some are calling a "trial balloon," got a lot of chatter and -- judging by the pickup in recent call-option purchases, particularly with September and October expiration periods -- the chatter may not be idle. RBC Capital suggested the drugmaker would be better off cutting its businesses right down the middle, saying that shares could jump by as much as 40% if management makes the cut.
Real Money's Jim Cramer says that Gilead's call volume on Thursday, particularly for call options with a September strike price, is "way too big to ignore," noting that demand appears to be accelerating on Gilead's buyside.
The analysts said there is "trapped value" in Gilead's current combination of hepatitis C virus (HCV) and human immunodeficiency virus (HIV) treatments, noting the HCV businesses are less transparent while dealing with mounting competition. The treatments are facing an environment of price erosion and eurozone uncertainties, added the analysts, led by Michael Yee.
But if Gilead divides itself -- and the HIV treatment businesses are set loose, RBC Capital says, a separate HCV treatment business would likely begin trading at roughly $40 to $50 a share, while the HIV treatment businesses would hit the market at $50 to $60 per share. And with Gilead closing at $79.57 Thursday, the bifurcated company would be worth 13% to 38% more.
The Foster City, Calif.-based drugmaker has long been pressured by its HCV businesses, with shares down 32% over the past 12 months, but RBC Capital says the separated business could better compete with Biogen (BIIB) , Amgen (AMGN) , Celgene (CELG) and AbbVie (ABBV) . (Biogen stock is held in Jim Cramer's Action Alerts PLUS charitable trust.
The big question is whether management finds such a procedure urgent, the analysts added. After speaking with management, Yee said that will likely depend on whether there is continued underperformance -- for example, additional periods of lowered guidance -- or if a like-minded activist surfaces.
"HIV and HCV are two distinct businesses that each make up about 50% of the company currently, yet they should have different valuations and distinct investor bases, in our view," Yee added. "Accordingly, we believe the combined entity of Gilead trading at 7x 2016 price-to-earnings may present long-term value, because HCV headwinds are 'over-penalizing' a healthy HIV franchise, which should trade at a minimum of 12 to 15x."
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A note from RBC Capital Thursday on Gilead Sciences (GILD) , which some are calling a "trial balloon," got a lot of chatter and, judging by the pickup in some of the drugmaker's call volume Thursday, the chatter may not be idle.
RBC Capital suggested the drugmaker would be better off cutting its businesses right down the middle, and shares are likely to jump by as much as about 40% if management makes the cut, analysts with RBC Capital said in an investment note.
This article has been updated on Thursday, August 18, to reflect commentary from Jim Cramer on recent increases in volume on Gilead call options.
Is Gilead Sciences (GILD) going to take the knife to itself?
A recent note from RBC Capital on Gilead, which some are calling a "trial balloon," got a lot of chatter and -- judging by the pickup in recent call-option purchases, particularly with September and October expiration periods -- the chatter may not be idle. RBC Capital suggested the drugmaker would be better off cutting its businesses right down the middle, saying that shares could jump by as much as 40% if management makes the cut.
Real Money's Jim Cramer says that Gilead's call volume on Thursday, particularly for call options with a September strike price, is "way too big to ignore," noting that demand appears to be accelerating on Gilead's buyside.
The analysts said there is "trapped value" in Gilead's current combination of hepatitis C virus (HCV) and human immunodeficiency virus (HIV) treatments, noting the HCV businesses are less transparent while dealing with mounting competition. The treatments are facing an environment of price erosion and eurozone uncertainties, added the analysts, led by Michael Yee.
But if Gilead divides itself -- and the HIV treatment businesses are set loose, RBC Capital says, a separate HCV treatment business would likely begin trading at roughly $40 to $50 a share, while the HIV treatment businesses would hit the market at $50 to $60 per share. And with Gilead closing at $79.57 Thursday, the bifurcated company would be worth 13% to 38% more.
The Foster City, Calif.-based drugmaker has long been pressured by its HCV businesses, with shares down 32% over the past 12 months, but RBC Capital says the separated business could better compete with Biogen (BIIB) , Amgen (AMGN) , Celgene (CELG) and AbbVie (ABBV) . (Biogen stock is held in Jim Cramer's Action Alerts PLUS charitable trust.
The big question is whether management finds such a procedure urgent, the analysts added. After speaking with management, Yee said that will likely depend on whether there is continued underperformance -- for example, additional periods of lowered guidance -- or if a like-minded activist surfaces.
"HIV and HCV are two distinct businesses that each make up about 50% of the company currently, yet they should have different valuations and distinct investor bases, in our view," Yee added. "Accordingly, we believe the combined entity of Gilead trading at 7x 2016 price-to-earnings may present long-term value, because HCV headwinds are 'over-penalizing' a healthy HIV franchise, which should trade at a minimum of 12 to 15x."
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