Gilead's R&D Woes Could Make it an Attractive Target for Allergan and Pfizer

Published: Nov 18, 2016

Gilead's R&D Woes Could Make it an Attractive Target for Allergan and Pfizer November 18, 2016
By Mark Terry, Breaking News Staff

With its hepatitis C franchise slowing down, many investors think Gilead Sciences should buy something soon to bolster revenue. But others think Gilead would make a tasty—but expensive—acquisition target. Maybe Pfizer ?

Gilead’s Harvoni still managed to bring in $5.58 billion in the first six months of 2016, but that figure is down from $7.19 billion in the same period in 2015. Earlier this week, the company announced that two Phase III clinical trials of momelotinib for patients with myelofibrosis failed to meet their top-line endpoints. And yesterday it terminated a deal with GlobeImmune for GS-4774 for hepatitis B.

But DoctoRx, writing for Seeking Alpha, argues that this is an opportunity for a big company like Pfizer or Allergan to snatch it up. Part of the rationale is simply that Gilead is still dominant in HCV, and its new triplet combination treatment, Epclusa + “vox,” also known as sof/vel/vox, is likely to still dominate, even if AbbVie comes out with a competitive product.

DoctoRx writes, “I also think that assuming the expected very strong results from its final single tablet regimen for HIV disease, or bicegravir/emtricitabine/TAF, Gilead will dominate this market globally until a cure is found. If none is found, the U.S. patent on bictegravir is expected to run until about 2033.”

And his point toward Pfizer is that although Pfizer has had some problems developing big products in-house, it’s really good at “taking a company, stripping it to the bone, and extracting value.”

Gilead has a pretty extensive history of failures or abandoned programs, with DoctoRx noting that the only drug the company’s had approved that wasn’t an antiviral was Zydelig, which isn’t doing as well as hoped. What does that mean? It’s possible that Gilead, with such a massive and sudden increase in revenue with Harvoni/Sovaldi, feels it has the money to play around with in the R&D sandbox.

An example is GS-4997, for selonsertib, an ASK-1 inhibitor. The company has evaluated it in three different diseases in three Phase II trials. It failed in pulmonary hypertension and diabetic kidney disease, but had some positive data for NASH, even though it wasn’t a particularly good clinical trial design.

DoctoRx writes, “So a rational view would be that this was a Phase IIa study, but not a proof of concept study. After all, from Gilead’s perspective, it was not just studying this drug for NASH. It was throwing it against three diseases and studying all three at the same time. It would not be unusual for the drug to be inactive in all diseases but fail in 2/3 studies and have some mildly positive results in the third one.”

He notes that, “jumping to Phase III on thin data is getting to be a habit.” And he comes out to aggressively question Gilead’s competence in research and development outside of antivirals. The suggestion is there that if a company like Pfizer bought it, it would enforce more R&D discipline.

In terms of price, well, that’s a problem, and limits the number of companies that could afford Gilead. Its projected sales for 2017 are $28 billion, with similar numbers for pre-tax profits. The HIV/AIDS sales are growing, and HCV has strong worldwide distribution. “If Pfizer were to pay 5X revenues,” DoctoRx writes, “that might equate to 6X pre-tax profits if there were no R&D expenses.”

Which all adds up to a deal price of about $140 billion, or slightly over $100 per share.

It would fit into Pfizer’s typical approach to big mergers and acquisitions. Merck has the money to do it. Allergan could do it, although DoctoRx notes that if it did, it would probably be related to tax savings, not just GAAP. Other companies who might have the interest and the capability? Bristol-Myers Squibb or AstraZeneca .

DoctoRx’s biggest concerns over Gilead is lack of R&D discipline. “So it may be time for major changes at Gilead. The simplest way is for the marvelous antiviral assets to go to a great global marketer with an acquisitive bent; thus Pfizer comes to mind, among others. If some offshoring of profits could be attained, then Allergan comes to mind along with a small number of the usual EU-based giants.”

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