Buying growth is a tricky choice for Gilead
Gilead Sciences is in a strategic quandary. Acknowledging that its sales will shrink in 2017 because of diminishing hepatitis C patient numbers, the group sees no choice but to pursue acquisitions to grow its top line.
The trouble is that it will take a big target with marketed or very late-stage assets to shift the revenue picture meaningfully, and there are few targets out there that fit the bill. The perils of Teva and Perrigo show how aggressive M&A pursued under pressure can cause investor and executive ructions – and Gilead’s business development record is not unblemished (see tables below).
Gilead executives’ 2017 guidance was low enough to make investors’ and analysts’ jaws metaphorically drop – $22.5-24.5bn versus EvaluatePharma’s consensus of $26.7bn.
The California-based group expects its non-hepatitis C sales to hold steady. The bottom will fall out of hep C, however, which could see sales shrink to $7.5bn in the worst case – half those booked in 2016. EvaluatePharmacurrently shows a sellside consensus forecast of $10.6bn for the hep C portfolio of Harvoni, Epclusa and Sovaldi in 2017.
The group blamed fewer patient starts, increased competition and shorter duration of treatment for the pessimistic revenue outlook. Shares fell almost 9% in the wake of the numbers.
With bad news out of the way, Gilead executives signalled quite clearly that 2017 would be a year of acquisition, with an emphasis on strategic similarities – to the point of even slowing share buybacks to free up cash. But, with the guidance blowing a multi-billion-dollar hole in near-term sales forecasts, it will take more than a R&D bolt-on to turn around the pessimistic outlook.
To move the needle Gilead will need to buy something with blockbuster sales and no signs of decline on the horizon. That leaves precious few that are affordable, and fewer still that are not single-product companies with significant developmental risks.
No great options
The companies listed below are not necessarily ones that Gilead would buy, but they are targets that fall in an affordability range and offer decent growth outlooks.
Gilead would have to stretch to take out Shire or Biogen – the latter of which would be more risky based on uncertainties surrounding its central nervous system franchise – but either one would generate sales growth. Smaller groups like Alexion, Vertex, Incyte and Biomarin would obviously be more affordable, but the tradeoff would be higher multiples.
|Moving the needle on Gilead|
|2022e sales ($bn)||Current market cap ($bn)|
Companies like Seattle Genetics, Incyte, Alnylam and Kite, meanwhile, have some or all of their revenue ascribed to pipeline candidates, meaning Gilead could be waiting years to see returns, and indeed might never do so if the products fail in the clinic.
Gilead’s business development teams surely must have looked at all of these options and decided not to move. Lack of a strategic fit may have played a role, but also its record as an acquirer has not been strong, arguably making decision-makers fearful of more mistakes. The company's share price slump no doubt also reflects investor fears of an expensive miscalculation.
|Gilead's 10 year M&A record|
|Target||Deal Value ($m)||Therapy area||Outcome|
|Calistoga||600||Cancer (PI3K inhibitors)||Unpromising|
|YM Biosciences||510||Cancer (Jak inhibitors)||Unpromising|
|Galapagos (minority stake)||425||RA (Jak-1)||TBD|
|CGI Pharmaceuticals||120||Cancer (Syk inhibitors)||Unpromising|
There can be no doubt that its $11bn takeout of Pharmasset paid off, since that provided the active ingredient behind Sovaldi, Harvoni and Epclusa. But below that Gilead's efforts are less than impressive – its efforts in cardiovascular, respiratory and oncology have been notably disappointing. Liver disease and rheumatoid arthritis could yet generate success, although these assets have largely been partnered rather than bought out.
The time for Gilead to have struck was a year ago, when it could have taken advantage of its record-high share price to leverage a bigger purchase. At the current market cap its options are fewer, and diminish each time its share price declines. Gilead can hardly waste any more time.
This story has been updated to include Tesaro in the first table.