3 Key Reasons Why a Gilead-Vertex Marriage May Not be a Match Made in Biotech Heaven

Analyst: 3 Key Reasons Why a Gilead-Vertex Marriage May Not be a Match Made in Biotech Heaven July 5, 2017
By Mark Terry, BioSpace.com Breaking News Staff

Investors and analysts really want Gilead Sciences to buy something, and are more than happy to offer up suggestions. The primary reason everyone is eager for Gilead to acquire something is because of its sagging hepatitis C franchise. Hepatitis C drugs brought in over $44 billion for the company in a three-year period, but in 2016 sales began to drop.

Recently, Geoffrey Porges, an analyst with Leerink, argued that Gilead should buy Vertex Pharmaceuticals (VRTX). However, George Budwell, writing for The Motley Fool, provided three arguments against Gilead buying Vertex. Let’s take a look.

Porges’ argument is that the more obvious acquisition targets for Gilead are oncology companies like Tesaro or Incyte . Allison Gatlin, writing for Investor’s Business Daily, notes that, “Vertex would offer Gilead a rare disease portfolio and a robust pipeline. Vertex is now working on a triple-pill combination to treat cystic fibrosis, a lung disease. It’s about a year ahead of its nearest rivals, Galapagos /AbbVie , and the regimen looks likely to launch in 2020.”

Porges said, “We would view an acquisition of a growing and largely de-risked revenue stream, such as Vertex, much more positively than a comparable investment, or set of investments, into the intensely competitive and technologically uncertain field of oncology.”

Despite that, and despite the fact that Gilead can clearly afford it with $32 billion in cash available, Porges doubts Gilead will buy Vertex. “It has been apparent that Gilead would need major acquisitions since 2015, and possibly even before then, and it is inexplicable to us that the company has been so faint-hearted in exercising their cash-flow advantage until now,” he wrote in a note to investors. “The company still appears to be responding to opportunities presented to them, rather than initiating and creating opportunities ahead of their availability.”

Budwell provides three arguments against the Vertex acquisition.

1. Vertex is overvalued. Noting that Vertex’s price-to-earnings ratio is 41.3 and price-to-sales ratio is 15.9, Budwell says, “Putting these numbers into context, Vertex is markedly more expensive than either of its orphan drugmaker peers Alexion Pharmaceuticals or BioMarin on a price-to-sales ratio basis. Both of these companies also have far more diversified pipelines and comparable near-term growth prospects.”

2. Not enough overlap. Or, as Budwell, says, “Poor fit.” Gilead essentially focuses on infectious diseases with growth in inflammatory diseases and cancer. Rare diseases are something of a sideline, primarily in cystic fibrosis, but he doesn’t believe that’s enough to warrant the acquisition. Vertex, after all, specializes in cystic fibrosis. He writes, Vertex’s “highly specialized sales force and R&D staff would largely need to be retained following a merger with the likes of Gilead—which, after all, has zero experience when it comes to developing late-stage cystic fibrosis drugs or marketing them. That means Gilead wouldn’t be able to institute any major cost-saving measures such as workforce reduction by buying Vertex.”

3. Weak pipeline. Budwell points out that Gilead’s history of mergers and acquisitions has been marked by buying promising early-stage drug candidates, pushing them through clinical trials, and getting blockbuster drugs out of the whole process. But Vertex doesn’t have a particularly exciting pipeline that hasn’t already been partnered or licensed by other companies. According to EvaluatePharma, Vertex pipeline doesn’t have any candidate in the “top 20 most-valuable research projects.”

Both Budwell and Porges agree that Gilead is unlikely to buy Vertex, even if they don’t agree on whether the company should. Budwell concludes, “Investors can probably bank on the biotech remaining cautious in its approach to M&A. Gilead, after all, still has a strong HIV franchise and its pipeline does have some noteworthy mid-stage assets that could revive its growth engine in a few years time.”

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