Gilead's New Hire Fuels Talk of an Acquisition

Published: Jan 09, 2017

Gilead's New Hire Fuels Talk of an Acquisition January 6, 2017
By Mark Terry, Breaking News Staff

Ever since Gilead Sciences announced that Alessandro Riva will head up its hematology and oncology division, investors have been speculating—and hoping—that it was an indication the company was finally planning on making a strategic acquisition.

The push for Gilead to make an acquisition isn’t new. It’s been ongoing for at least the last year. Over the last 15 or 16 years, the company has gained more than 4,930 percent. But it’s essentially built on hepatitis C (HCV) and HIV drugs. Most investors and analysts think the company needs a strategic acquisition to jumpstart its revenue by branching into new areas or by acquiring companies—or both. Particularly since its blockbuster HCV franchise is facing patents cliffs and competitive headwinds.

The flipside is that many investors think Gilead would make for a tasty acquisition target, albeit an expensive one. Potential buyers such as Merck & Co. have been floated.

But the hiring of Riva as senior vice president, Hematology and Oncology Therapeutic Area Head has caused investors to believe that an acquisition might be at the top of the list. Riva arrives from being Head, Global Oncology Development for Novartis Oncology .

Shortly after the announcement, Brian Abrahams, an analyst with Jefferies, wrote in a note to investors, “We believe the relatively high-profile heme/onc chief hire signals an increasing focus in oncology, a welcome development, and expect Gilead to more aggressively pursue BD (business development) to build out a broader cancer pipeline—something not substantially baked into most expectations but which we believe could help improve sentiment around the name and LT (long-term) revenue prospects. We expect speculated (s)mid-cap M&A candidates like Incyte (INCY) could also trade up on this announcement.”

Incyte is the target-of-choice for investors, whether for Gilead or other larger companies looking for entry into the oncology market. Jing He, an analyst with Gabelli, wrote, “We believe adding Dr. Riva to its executive team makes Gilead more likely to buy Incyte, which is led by a team of Novartis veterans and has collaborated with Novartis Oncology on its key drug, Jakafi, as well as capmatinib. Dr. Riva also acted as interim President of Novartis Oncology in 2014, after Herve Hoppenot left the position to become the CEO of Incyte. Dr. Riva and Mr. Hoppenot both served senior management roles at Novartis Oncology in the past decade and earlier at Aventis (now Sanofi ). Incyte and Novartis have co-developed Jakafi since 2009 and Novartis is responsible for Jakafi’s ex-US commercialization. We believe Dr. Riva will bring unique perspective on oncology drug development, especially on Jakafi and capmatinib.”

Acquiring Incyte would bring in sales and royalties on Jakafi, which were about $1 billion in 2016, royalties for baricitinib, which is expected to be approved for rheumatoid arthritis in the first quarter of this year, and a strong oncology pipeline.

So why not buy Incyte?

It’s pricy. Seeking Alpha writes, “Incyte’s valuation is quite rich, the stock is trading at a forward P/E ratio of almost 66x and the EV/EBITDA multiple is also fairly high. Incyte has only one approved drug and although its sales have been rising, the drug still generates around $1 billion in sales. Its revenue to market cap is at around 20x.”

On the other hand, Gilead has plenty of cash and Incyte has less than $700 million in debt. Seeking Alpha writes, “From all the angles, fundamentals and business mix, Incyte looks a good fit for Gilead. However, the valuation is the biggest stumbling block. It all boils down to the price that Gilead management is willing to pay in order to stop the decline of the stock price.”

Before Pfizer bought Medivation , Medivation was floated as a possible acquisition target for Gilead. Other companies suggested include Dynavax Technologies Corp. , Kite Pharma , Juno Therapeutics , Arrowhead Research Corporation and Achillion Pharmaceuticals .

Or as Adam Feuerstein wrote for TheStreet yesterday, “The hiring of former Novartis executive Alessandro Riva to run the foundering hematology/oncology business is once again raising hopes that Gilead WILL. BUY. SOMETHING. MEANINGFUL. MAYBE.”

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