3 Potential Acquisition Targets for Gilead Sciences, Inc.

Gilead Sciences (GILD -1.15%) is looking to make a deal.

That's basically what the biotech's executives said in Gilead's third-quarter earnings call on Nov 1. Which companies might be good acquisition targets for Gilead? While many investors put Incyte high on the list, here's why Kite Pharma (NASDAQ: KITE), Tesaro (NASDAQ: TSRO), and Intercept Pharmaceuticals (ICPT) could be even better choices for the big biotech. 

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High-flying cancer pipeline

Gilead CEO John Milligan mentioned in the last earnings call that his company is especially focused on building its oncology business. That should make Kite Pharma an attractive candidate.

Kite's lead pipeline prospect is chimeric antigen receptor (CAR) KTE-C19. The biotech plans to initiate a rolling submission to the U.S. Food and Drug Administration (FDA) for accelerated approval of KTE-C19 in treating aggressive non-Hodgkin lymphoma by the end of this year. If all goes well, Kite thinks KTE-C19 could win U.S. regulatory approval later in 2017.

Three other clinical studies of KTE-C19 are also underway. Data from the phase 2 portion of a phase 2/3 study targeting treatment of mantle cell lymphoma is expected next year. Kite has two early stage studies of the CAR therapy, one focusing on adult and pediatric acute lymphoblastic leukemia (ALL) and another focusing on treatment of diffuse large B-cell lymphoma.

In addition to its CAR development program, Kite's pipeline includes three early-stage T cell receptor programs. Two of those phase 1 studies target solid tumors while the other study is focused on cervical and head and neck cancer.

Kite's market cap right now stands at just under $2.6 billion. With tremendous potential for KTE-C19, the biotech could be just what Gilead needs to augment its relatively weak oncology portfolio.

A bird in the hand and three in the bush

If Gilead wanted to scoop up a company with at least some revenue already coming in, Tesaro might be a good fit. The small biotech already has one product on the market, Varubi, which treats delayed chemotherapy-induced nausea and vomiting (CINV). But an even bigger draw for Tesaro is its three pipeline candidates.

Tesaro recently completed a rolling submission of a New Drug Application (NDA) for niraparib as a maintenance therapy for ovarian cancer based on positive results from a late-stage study. The poly (ADP-ribose) polymerase, or PARP, inhibitor is in another late-stage study for treating breast cancer. 

Niraparib is also in a couple of mid-stage studies targeting treatment of ovarian cancer, with one of those studies including the PARP inhibitor in combination with Avastin. In addition, two early-stage studies of niraparib in combination with other therapies are in progress.

Most of Tesaro's pipeline is built around Niraparib, but the biotech does have a couple of other clinical-stage candidates. Anti-PD1 monoclonal antibody TSR-042 is in an early-stage study targeting various types of tumors, as is anti-TIM-3 monoclonal antibody TSR-022.

Tesaro's market cap of $6.8 billion is more expensive than Kite. That's understandable, though, considering the biotech's commercial product and more advanced pipeline. I could easily see niraparib and Varubi sitting beside Zydelig in Gilead's cancer drug lineup.

Going in a different direction

Should Gilead go a different route instead of buying a biotech focusing on cancer? John Milligan said the company wouldn't rule out acquisitions in other indications. Intercept could be a smart pick if Gilead chose to take another path.

Like Tesaro, Intercept already has a product on the market. Ocaliva won FDA approval in May for treatment of primary biliary cholangitis (PBC) in combination with ursodeoxycholic acid (UDCA). PBC is a chronic liver disease for which there is currently no cure. 

An even bigger potential indication for Ocaliva is in treating nonalcoholic steatohepatitis (NASH) -- another chronic liver disease with no cure or effective treatments. Intercept plans to announce top-line results from a mid-stage study of the drug in treating NASH in 2017 and is targeting enrollment of the interim analysis cohort of a late-stage study for the indication in the first half of next year.

But doesn't Gilead have its own pipeline candidates for PBC and NASH? Yep. The big biotech has three mid-stage studies in progress targeting NASH and another focusing on PBC. It might not seem to make sense that Gilead would consider buying Intercept because of this overlap. However, Gilead is behind Intercept in the race to claim a share in the potential $40 billion NASH market.

Intercept's market cap of $2.9 billion isn't much higher than Kite's. Gilead would get a jump over rivals in the lucrative NASH indication by acquiring Intercept. That head start might be critical, especially considering the continued sales decline of Gilead's hepatitis C cash cows Harvoni and Sovaldi.

All of the above

Why settle for just one company when you can have them all? Gilead has nearly $32 billion on hand, counting cash, cash equivalents, and marketable securities. The combined market caps of Kite, Tesaro, and Intercept totals $12.3 billion. Even with a nice premium added to that amount, Gilead could afford to buy all three smaller biotechs and still have plenty of money left over.

There are also other biotechs that could be good fits for Gilead, but I like these three especially. If Gilead wants to generate some major investor enthusiasm, acquiring one (or more) of these biotechs could do the trick. It's time for Gilead to make a deal.