AstraZeneca reportedly eyed a merger with Gilead. But does 'Gileaz' make sense?

Mergers and acquisitions deals consolidation
AstraZeneca reportedly approached Gilead Sciences for a potential merger that could set a new record in the biopharma industry. But Wall Street analysts see little reason for a combination between the two. (Getty/Kritchanut)

Six years ago, AstraZeneca CEO Pascal Soriot fought off Pfizer’s $118 billion takeover attempt. Now, the defender is reportedly playing offense, going after a deal of similar size.

The British pharma informally approached Gilead Sciences last month to gauge its interest in a merger, Bloomberg reported, citing people familiar with the matter.

Gilead, whose stock price has climbed about 17% this year on news its remdesivir can tackle the novel coronavirus, was worth $96 billion at Friday’s close. AstraZeneca, with a University of Oxford COVID-19 vaccine project, comes with a market cap of about $140 billion. At the current value, the deal, if completed, would set a new record for pharma M&A, eclipsing Bristol Myers Squibb’s $74 billion acquisition of Celgene last year.

That’s a big if. According to Bloomberg, the talk was in very early stages, as AZ didn’t detail any specific terms and Gilead hasn’t made a decision on how to move forward.

The U.S. biotech doesn’t seem interested in selling. It’s focused on forming its own partnerships and completing smaller acquisitions rather than considering a merger with a big pharma company, the people told the news service.

At least two Wall Street analysts were skeptical of a potential deal. “We do not view this deal as likely,” Jefferies’ Michael Yee wrote in a Sunday note to clients. He pointed out that Gilead believes its HIV franchise, led by fast-growing Biktarvy, is underappreciated and “would prefer to build value over time and do its own tuck-in deals.”

RELATED: Remdesivir stockpiling could help push COVID-19 drug into profitable territory for Gilead: analyst

Besides, selling the company only 15 months into the job would be “very early and quick” for CEO Daniel O’Day, Yee said. O’Day has just started executing a turnaround strategy of partnerships and bolt-on acquisitions, as he laid out at the J.P. Morgan Healthcare Conference in January. After the $5.1 billion expansion of its Galapagos collaboration last year, Gilead just waded deeper into oncology with a $4.9 billion acquisition of Forty Seven and a potentially $2 billion partnership with Arcus Biosciences.

Besides, it has yet to maximize the value of remdesivir, Yee added. Since its FDA emergency use authorization for the treatment of COVID-19, remdesivir has attracted great interest across the globe. A team at SVB Leerink recently predicted sales of $1.9 billion this year as Gilead’s expected to start charging for the drug after the initial donated supply runs out around July. Its peak sales estimate? $7.6 billion in 2022, thanks to orders for national stockpiling.

What’s in it for AstraZeneca? That again puzzles industry watchers. In two recent pharma megadeals—BMS for Celgene and AbbVie for Allergan—the acquirers were both suffering from challenged stock prices and “looked at the megamergers as the only way out,” Yee said. But AstraZeneca’s stock price is at an all-time high, buoyed by strong performance from an oncology franchise that includes blockbusters Tagrisso and Lynparza.

RELATED: Pfizer, Merck, AZ, J&J and Moderna selected as 'Warp Speed' finalists: NYT

Wolfe Research analyst Tim Anderson expressed a similar attitude in his Sunday analysis. “Big deals in big biopharma almost always happen when the bigger company is in a position of weakness,” he said. “AstraZeneca is not in this position.”

Yes, Gilead is actively expanding in oncology and inflammation, which could work with AZ’s own efforts in these fields. But about three-fourths of Gilead’s business lies in HIV, an area where AZ has no presence. And its newfound interest outside of virology implies these projects are likely higher risk—just consider the $12 billion buyout of CAR-T specialist Kite Pharma, which just led to an $800 million write-down. Not to mention, AZ has its own therapies, including Daiichi Sankyo-partnered antibody-drug conjugate Enhertu, in what Anderson called a “pipeline within a product.”

Is there an imminent problem at AZ that would prompt a move to diversify? Anderson said he couldn’t find one, adding that it’s one of those businesses “where it is hardest to come up with plausible, material, bear-case scenarios.” Despite its low cash flow, AZ’s business remains strong, with no big upcoming patent cliffs and no major growth-driving products facing imminent competition, he said.

As for remdesivir, Anderson argued its commercial potential is “still TBD with more questions than answers.” For one thing, Gilead has yet to unveil the sticker price for the antiviral, and it may face a no-win situation amid a pandemic. Even if remdesivir succeeds this year or next, Anderson’s worried it might be hepatitis C all over again, in which a sharp sales increase is followed by a sharp decline—and investors prefer steady revenue streams over a roller coaster, he said.

Anderson doubts this deal will go through, suspecting that “it merely reflects AstraZeneca exploring options as part of its normal business development efforts.”

RELATED: The top 20 pharma companies by 2019 revenue12. AstraZeneca14. Gilead Sciences

RBC Capital’s Brian Abrahams appears to be a proponent of the deal, arguing Gilead’s strength in virology could “round out” AstraZeneca’s portfolio, and that its “burgeoning” oncology pipeline could dovetail well with AstraZeneca’s existing offerings.

What’s more important, as the initial excitement over remdesivir is gradually being washed out of Gilead’s stock, the company is trading at 12.5x earnings per share, way below the 20x average for large-cap biotechs or 13.1x for a large-cap pharma, making it a cheap target right now. That might change when O’Day manages to steer the ship around.

Besides, given that Soriot and O’Day previously worked as executives at Roche at the same time, Abrahams figures they may be more willing to work together.

Editor's Note: The story has been updated with additional analysis from RBC Capital.

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