M&A

Pining for a megadeal, an analyst kicks the tires for another Gilead M&A test drive

John Milligan

Gilead CEO John Milligan drew plenty of nods recently when he said you have to ignore what’s going on in Washington DC and just run your business. But he was ignoring top analysts long before he got a chance to tune out the Trump administration.

Some prominent stock watchers have been insisting for some time now that Milligan and Gilead $GILD have to use a mountain of cash on hand to grab a big pipeline/portfolio that can reenergize the falling numbers in their revenue forecasts. With the hep C peak behind it, the stock needs new mountains to climb to inspire investors. But the CEO sits on Gilead’s cash and quietly bides his time – just like almost every other big player that’s supposed to be in the buyers’ circle this year.

Geoffrey Porges, Leerink

Not too bothered by that, Leerink’s Geoffrey Porges has not only spelled out the reasons why he’d cheer a Vertex $VRTX buyout, twice, he’s now expanding Milligan’s menu with another biotech that is on everyone’s M&A watch list: Incyte $INCY.

Porges still likes Vertex best. It has a proven presence in the cystic fibrosis market with a good pipeline. The numbers can work. An Incyte deal would depend on seeing its IDO1 star epacadostat come through with an approval and a market hit to warrant the cash needed to buy a company with a market cap of $27 billion. But Porges believes that if they get in there and really carve up the expense side of the business at the Delaware biotech — read: big layoffs — an acquisition can play out quite nicely. There’s upside in the hot immuno-oncology field and Incyte has a flagship drug as well. Notes Porges:

Incyte’s flagship product, Jakafi (ruxolitinib), is approved in multiple hematological indications and geographies and fits the profile of Gilead’s portfolio and organization, particularly since the demise of their own JAK inhibitor, momelotinib. Incyte has a promising immunotherapy drug in late-stage development with epacadostat, as well as a portfolio of emerging oncology products of uncertain value. Our preliminary analysis and illustrative merger model indicates that Gilead could afford to pay ~30-40% premium ($173-187/share) for Incyte and still generate a robust ~19% accretion by year 5. Similarly, our analysis indicates that the transaction could generate a significant 11% internal rate of return (IRR) for Gilead shareholders over the next ten years. This rate of return is slightly higher to the expected return from our earlier analysis of an acquisition of Vertex, and would amount to a successful deployment of capital, at least up to a price of $220/share.

The year got started with a tremendous burst of enthusiasm for the buyouts to come this year. But M&A has largely been a bust, with big distractions on tax reform as well as an unresolved case of sticker shock for everything on the market with a nice set of assets to inspect. In the meantime, a little online window shopping will have to substitute for the real thing.

 


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