Gilead should buy Vertex, analyst suggests--and the time is now

Bernstein analyst Geoffrey Porges

While pharma's been riding its deal wave, Gilead's ($GILD) been off on its own, coasting on new revenue from blockbuster hep C launches Sovaldi and Harvoni. But one analyst thinks the time is ripe for it to get in on the M&A action--and he's tabbed Vertex ($VRTX) as a prime target.

The way Bernstein analyst Geoffrey Porges sees it, Gilead's going to need some top-line assistance when its primary drug franchises--HIV and hep C--hit trouble in 2017. Between an upcoming patent cliff for HIV med Viread and incoming hep C competition from Merck ($MRK), Porges sees 30% to 40% of the California company's revenue going down the tubes between 2017 and 2021.

That's a situation it can better, though, if it gets some help in advance--and it has the means to do it now. "Gilead has an enormous surplus of near term cash flow" as well as "the opportunity to invest in strategic M&A before those threats come to fruition," Porges wrote in a note to investors.

So why Vertex? Well, for starters, it's slim pickings, he admits. As he notes, there are only 5 independent biopharma companies in the $10 billion to $35 billion market cap range in Medivation ($MDVN), Incyte ($INCY), BioMarin ($BMRN), Vertex and Alexion ($ALXN). And thanks to Vertex' cystic fibrosis, he thinks makes the most sense for Gilead, which already has a product for the condition--Cayston--and commercial infrastructure in place.

That doesn't mean Vertex doesn't have its own hurdles ahead, too--but they're hurdles Gilead knows how to clear, Porges figures. Vertex's greatest challenges are in the development and commercialization of complex multi-drug combinations, which is "something Gilead knows a thing or two about," he wrote.

Vertex will also be navigating a tricky payer landscape once it wins FDA approval for a new Kalydeco combo--expected to run at an orphan drug price despite a patient population potentially 10 times the size of its current pool. And with costly Sovaldi--and, now, Harvoni--Gilead is basically in the process of writing the book on how to help payers swallow a lofty sticker price.

So assuming Gilead does go Porges' route, how would the deal look? The biotech could "easily absorb" the cost of buying vertex at a 50% premium on a 20% cash and 80% debt basis, Porges wrote, and he estimates a $45 billion acquisition could yield a 27% revenue increase for Gilead by 2020.

Special Reports: The top 15 pharma companies by 2014 revenue - Gilead Sciences | The top 20 orphan drugs by 2018 - Kalydeco | Pharma's top 10 M&A deals of 2014

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