M&A

Meacham’s manifesto to Gilead: It’s time to do something dramatic — buy, bag or burn

After watching Gilead’s pipeline falter in the second half of last year followed by a stunning forecast of rapidly shrinking revenue for its hep C franchise, Barclays senior analyst Geoff Meacham has had it. In an unusual public broadside aimed at Gilead $GILD CEO John Milligan and his executive team, Meacham threw down the gauntlet in an open letter to management, calling out plays from the bleachers designed to spur the big biotech to buy something and even possibly restructure if the numbers deteriorate much further.

Meacham made it clear that this will not come as a surprise to Gilead’s team.

John Milligan

“A transformational or even incremental transaction has been the focal point for perhaps 90% of our discussions on Gilead over the past three years,” he says.

Meacham has been in the Greek choir of analysts who routinely note that Gilead needs to use its considerable cash reserves to get a deal done now. He notes that the company will have diminishing capacity for deals as its cash flow weakens. And he’s not too particular about what Gilead — a company that made a couple of the best takeovers in the history of biotech — buys next.

Can’t find something strategic? No problem. Meacham’s recipe for a turnaround highlights some non-core possibilities that are hot these days. And he’s even very specific about what kind of drugs Gilead should go after.

First, we think that the orphan business models fits well within Gilead’s cost structure. Of course, this falls into “financial, not strategic” category but orphan franchises in PNH/aHUS or CF, for example, could provide a long-term, durable business with 2020 revenues north of $4B. We think that diversification outside of anti- virals would be very well-received by most investors with the benefits from an improving business mix outweighing potential near-term dilution.

Geoff Meacham

Don’t overlook a pipeline opportunity either, Meacham advises. But woe to Gilead or any company that tries to buy another company the same size and then slash jobs with the job-creating President Trump in the White House.

There are many companies that fall into this category including those with and IDO or PARP inhibitor or a Hodgkin’s lymphoma franchise. Lastly, we don’t think that a merger of equals with a larger biopharma would make sense given that cost synergies (i.e., layoffs) could be a significant headwind in this political environment, shares may not be awarded a higher P/E multiple, and business complexity would increase dramatically. In this respect, buying a market leading I/O franchise or a multiple myeloma franchise seems less value-add to us.

Don’t like M&A values these days? Go for a campaign of in-licensing deals. Sure that the bictegravir-TAF Phase III program will come through? Spell out some revenue projections. Expect hep C revenue to develop into a tailspin? Think about restructuring and cutting costs. And finally, stop spending so much money on buybacks and dividends. That powder needs to be conserved for bigger game.


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