September 23, 2016
By Mark Terry, BioSpace.com Breaking News Staff
Since Dublin-based Allergan is in a buying mood, having completed a string of deals in the last few months, why not a big merger with Gilead Sciences ? Kevin Kedra, an analyst with Gabelli, recently argued that Allergan was “playing chess while the market is playing checkers,” by making smaller strategic acquisitions that would lead to buying Gilead. Max Nisen, writing for BloombergGadfly, says, “Nope, not gonna happen.” Let’s see what the arguments are.
Since April, Allergan has acquired Topokine Therapeutics, ForSight VISIONS, Vitae Pharmaceuticals , and Tobira Therapeutics . It picked up a $150 million breakup fee when the Pfizer deal collapsed, and received $40 billion from selling its generics business to Israel-based Teva .
At least one question being asked is, if Allergan is willing to cough up a 500 percent premium for Tobira, what else are they willing to pay for?
Another possible factor is the company’s strategic rationale for acquiring Tobira, which appears to be leading the charge in developing drugs to treat non-alcoholic steatohepatitis (NASH) and other liver diseases. Tobira has two complementary development programs for NASH, Cenicriviroc (CVC) and Evogliptin. CVC is about to enter Phase III and Evogliptin is currently in a Phase I trial.
Kedra interprets that to mean that Allergan is committed to liver diseases and NASH. Gilead is a dominant player in liver diseases, with hepatitis C and a strong pipeline of NASH drugs.
Nisen, as a counterpoint, writes, “If it’s serious about liver disease, then buying the industry leader makes some sense. But everything Allergan is doing suggests it’s positioning itself as a competitor to Gilead’s NASH drugs, not a parent.”
At least two other factors make a Gilead acquisition likely. One is simply debt load. Allergan still has about $33.2 billion in debt. Although the $40 billion cash figure has been bandied about, at its second-quarter earnings call, it had $27.56 billion in cash. Since then it’s had four deals, and the ones this month cost more than $1 billion by themselves. It’s also been undergoing a stock buyback program worth $5 billion. Nisen estimates the company’s current cash balance is probably more like $20 billion than $30 or $40 billion.
Kedra also argues that an Allergan-Gilead merger would resolve some of Gilead’s tax issues with a tax inversion. Nisen thinks this is unlikely, writing, “But staying in bounds of the Treasury’s new tax-inversion rules is no mean feat. And the government has shown itself more than willing to throw new and exotic wrenches into the works of big deals. Given the still-recent trauma of Allergan’s failed Pfizer deal, it’s hard to imagine the company is in a hurry to jump back into the inversion morass.”
Part of the argument for Gilead, of course, is how depressed its stock is. It’s lost about 35 percent of its value since June 2015. This is mostly related to concerns over slowing sales of its hepatitis C franchise. But Gilead also controls about 58 percent of the HIV drug market.
Other big companies might be interested in Gilead. Even though it’s facing stiff competition in the HCV market and GlaxoSmithKline might be nibbling away at its HIV/AIDS franchises, the company’s releasing data from nine clinical trials involving five different drugs in six different diseases between now and the end of the year. Those diseases include NASH, primary cholangitis (PSC), myelofibrosis, diabetic kidney disease, and ventricular tachycardia.
And if Allergan’s not interested, Pfizer might be. And Merck , though unlikely, has a virology focus that would be a good fit.
