The excitement over a potential record-setting megamerger between AstraZeneca and Gilead Sciences looks short-lived.
AstraZeneca has already ditched its interest in a marriage with Gilead, The Times of London reported Monday, shortly after Bloomberg said the British pharma had informally approached the U.S.-based Big Biotech for a deal.
AZ has ruled out the prospective deal because it would have distracted the company from its own pipeline and ongoing COVID-19 vaccine efforts, sources told the British newspaper.
Talk of the tie-up had already drawn skepticism from Wall Street. Analysts at Jefferies, JPMorgan, Wolfe Research and SVB Leerink all questioned the rationale of an AZ-Gilead megamerger.
Even if AstraZeneca were indeed looking to leverage its current market heft by striking a large buyout to diversify its offerings, other targets such as Biogen, Amgen or Alexion might be “equally suitable” for the purpose and more “amenable” than Gilead, SVB Leerink’s Geoffrey Porges said in a Monday note.
“Gilead’s fortunes are improving, investor sentiment is positive, management is new, fresh and energized, and the company’s operating and strategic performance has been strong,” he wrote.
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Most biopharma transactions emerge from distress, but neither AZ nor Gilead is in that situation—an observation shared by Porges, Jefferies’ Michael Yee and Wolfe’s Tim Anderson.
In two recent biopharma megamergers, Celgene and Allergan were sold after prolonged underperformance and investors’ growing dissatisfaction with management, Porges noted. As for their respective buyers, one of Bristol Myers Squibb’s flagship products, PD-1 inhibitor Opdivo, has been under pressure, and AbbVie’s top-selling Humira is facing U.S. biosimilar competition soon.
Gilead had indeed been suffering since the once humongous hepatitis C market shrank significantly. But new CEO Daniel O’Day has already made a mark, steering the company toward growth by refocusing on oncology. Plus, his new leadership team has just been assembled and is therefore unlikely to be looking for an exit through M&A, Porges said.
Besides, there’s little room for potential cost-cutting via a merger with AstraZeneca. Gilead is already operating quite efficiently, as the long-term sustainable operating margin for its core business is over 50%, considerably higher than the average for Big Pharma companies, Porges pointed out.
There could also be a geopolitical question in play here. In its 33-year history, Gilead has built a reputation for breakthrough R&D, having contributed to making HIV a manageable disease and hep C highly curable. Now, remdesivir has become the first antiviral approved anywhere to treat COVID-19. All of that—plus the government funding Gilead snared along the way—makes the company a valuable U.S. asset.
“Given this track record, and the intimate relationship of the U.S. government to the development and purchase of Gilead’s medicines, we would be very surprised if ownership of Gilead was permitted to leave the U.S.,” Porges argued. That is even more true amid the Trump administration's push for onshoring of drug R&D and manufacturing to protect the national interest.