As Market Roars, Gilead Looking for "Value-Added" Deals, Says CFO

Published: May 22, 2015

As Market Roars, Gilead Looking for
May 22, 2015
By Riley McDermid, Breaking News Sr. Editor

Booming biotech Gilead Sciences, Inc. is looking for “value-added” deals as opposed to ones that create synergies, the company’s chief financial officer told attendees at the UBS 2015 Global Healthcare Conference in New York this week, renewing speculation that Gilead may be looking to buy a large pharmaceutical operation with an existing research and development and manufacturing arm.

CFO Robin Washington said Gilead is currently using an “operationally leveraged model” that looks at M&A that don’t interfere with Gilead’s “big picture” plans.

“We’re not necessarily interested in M&A focused on synergies [as] it causes us to spend a lot of time downsizing. So it’s not so much just a headcount,” she said. “I think it’s just really where we think we can add the most value to M&A that we might consider.”

Washington said Gilead would probably look at earlier stage buys, where its own internal strategy could “influence the development path.”

The question of what cash-flush Gilead will buy has been on the market’s mind for several weeks now, with varying schools of thought on the matter jockeying for position.

One is that Gilead would be smart to stick to smaller, cancer-focused companies when going shopping, Royal Bank of Canada (RBC) analyst Michael Yee wrote in a note last week, as the company begins trying its hand at deal making.

Yee said that although Gilead has the cash to do bigger deals, its expertise and pipeline are cancer-based, and it should make smaller buys as opposed to a larger “transformational” one. Gilead’s cancer pipeline remains its crown jewel and should be nurtured, wrote Yee.

That distinction is an important one, because some analysts have been pushing for Gilead to merge with larger competitor Vertex Pharmaceuticals , a deal Yee apparently thinks is unnecessary.

“[For Gilead] 1) expectations are low on this program (few if any investors ask on it), (2) pipeline is all upside for Gilead at this point, (3) management is quietly building a pipeline and we predict they’ll continue to do more cancer and immuno-oncology deals less than $5B in size and they’re looking in European Union (EU) perhaps using OUS (Outside US) cash.”

Still, Gilead has been at least a little active: The company finally made Wall Street analysts happy last week when the company said it would acquire privately-held Danish company EpiTherapeutics for $65 million, a week after the company’s chief executive said the firm was open to doing deals.

The company is a good bolt-on fit for Gilead, said execs at the time.

“Epigenetics is a promising area of research and the EpiTherapeutics team is a recognized scientific leader in this field,” said Norbert Bischofberger, Gilead’s executive vice president for Research and Development and chief scientific officer.

“This therapeutic class represents a strategic fit with our existing research portfolio, including the potential for novel combination approaches. We look forward to working with colleagues from EpiTherapeutics to advance these programs toward clinical development in diseases with significant unmet medical need.”

EpiTherapeutics is backed by NOVO Seeds, SEED Capital, Lundbeckfond Emerge, MS Ventures and Astellas Ventures, Back Bay Life Science Advisors of Boston advised EpiTherapeutics.

Wall Street has been waiting for more M&A from Gilead after a brilliant performance during the first quarter of 2015 buoyed the biotech darling, and analysts impressed by the company’s performance once again started guessing that the company could go shopping for deals within the next few quarters.

Gilead’s revenues grew 52 percent year over year to $7.6 billion, with diluted earnings per share of $2.76 handily beating Wall Street’s estimate of $2.21. Its profits almost doubled to $4.3 billion and it said it now expects 2015 product sales to weigh in at $29 billion, a massive jump from the previously estimated $2 billion.

All that money means Gilead should be making some deals fairly quickly, said CEO John Martin. “We are open to suggestions,” he said during the company’s earnings call.

The company’s crown jewels, hepatitis C drugs Harvoni and Sovaldi, drove a lot of that growth, with Geoffrey Porges, a biotech analyst at Sanford Bernstein, noting “HCV revenue of $4.6B was well ahead of consensus ($3.7B), driving healthy EPS upside ($2.94 vs consensus of $2.27) and an increase in guidance.”

Closely watched Evercore ISI biopharma analyst Mark Schoenebaum had only one word to illustrate what he thought about Gilead’s quarter: “Wowza.” Joshua Schimmer, an analyst at Piper Jaffray, simply said Gilead “crushed” the quarter.

“Total HCV product sales were up 19 percent sequentially despite competition from ABBV. The large increase was driven by volume, which was partially offset by a higher level of rebates,” wrote Schimmer in a note to investors.

“During Q1, Harvoni sales reached a record level of $3.6 billion whereas Sovaldi sales fell to $972 million as the majority of new GT1 pts chose Harvoni. Sales in EU reached an impressive $960 million this quarter, significantly higher than our initial estimate of $625 million. Our thesis that considerable upside lay in the ex-U.S. HCV franchise seems to be playing out.”

Martin’s openness to deals are music to some analysts’ ears. Market watchers have been pushing Gilead Sciences, Inc. (GILD) to buy scrappy competitor Vertex Pharmaceuticals for its booming cystic fibrosis drug franchise, with yet another closely watched columnist weighing in that the deal makes plenty of sense from a value perspective.

Porges said last month that Gilead should make the buy for $45 billion, making the case in a note to investors last Tuesday that a Gilead/Vertex deal would create significant long-term value for Gilead.

Alexander Poulos, a columnist at Seeking Alpha, said he thinks the deal is a solid idea and worth chewing over.

“The VRTX/GILD combo makes quite a bit of sense from a discounted cash flow perspective…the melding of VRTX allows GILD to overcome the drop in revenue expected from the HCV franchise as patients are cured,” wrote Poulos. “The market is assigning GILD the lowest multiple in the sector due to the fear the revenue from the HCV franchise is not sustainable. The acquisition of VRTX would eliminate this fear thus paving the way for GILD multiple to expand.”

“Naturally, a new novel therapy for an unmet need such as a viable treatment for Hepatitis B (HBV) or Non-Alcoholic Steatohepatitis (NASH) would significantly add to GILD revenue generating ability,” he said. “My current price target for GILD is $117 as detailed in a previous article. Assuming VRTX newest combo is approved, it is quite reasonable to conclude the proposal makes sense.”

In Porges’s original note, titled “It's Time! Why Gilead Should Pull the Trigger on a $45bn Bid for Vertex…and Why Both Stocks Should Go Up,” argues that Gilead’s marriage to Vertex would solve lingering doubts about the company’s long-term revenue prospects. Many investors remain mystified as to what Gilead’s management has in store and Porges would like them to consider a major bolt-on buy like Vertex.

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