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Would Gilead Sciences Make This Staggeringly Audacious Move?

By Keith Speights - Apr 7, 2017 at 2:43PM

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Many expect Gilead Sciences to buy Incyte. But what if the biotech instead went big -- really big?

Everyone and their brother wants Gilead Sciences (GILD -0.99%) to make an acquisition. Gilead's CEO, John Milligan, has indicated a preference for buying another biotech to bolster his company's oncology portfolio. However, Milligan has also stated that inflammation and non-alcoholic steatohepatitis (NASH) could be other areas that Gilead would like to beef up. 

Many observers think Gilead might try to buy Incyte (INCY -2.24%) to pick up the smaller biotech's impressive cancer drug pipeline. A crazy thought occurred to me, though. What if Gilead instead made a play for Celgene (CELG)? Would the big biotech possibly make such a staggeringly audacious move? And could it work?

Two shadows pushing two giant jigsaw puzzle pieces together

Image source: Getty Images.

Checking off boxes 

So Gilead wants to build its oncology portfolio? Celgene would bring two blockbuster blood cancer drugs with Revlimid and Pomalyst. Abraxane, which is currently approved for treating breast cancer, lung cancer, and pancreatic cancer, is close to achieving $1 billion in annual sales. 

Celgene's oncology pipeline also includes seven other candidates that could be approved by 2022 that have blockbuster sales potential. The most notable of these is luspatercept, which is being evaluated in two late-stage clinical studies for treating myelodysplastic syndromes (MDS) and beta-thalassemia. 

Milligan also said he wanted to expand Gilead's inflammation lineup. Celgene is a great fit there, also. Otezla is already making money hand over fist as a treatment for psoriasis and psoriatic arthritis. The drug is being evaluated for treating four other autoimmune disease indications as well. Celgene's pipeline boasts several strong anti-inflammatory candidates, especially ozanimod and GED-0301.

The only box that Celgene doesn't check off for Gilead is improving its NASH portfolio. However, two out of three certainly isn't bad. 

Solving the growth dilemma

Gilead's need for an acquisition is to solve its growth dilemma. While the company's HIV drugs continue to perform well, its hepatitis C virus (HCV) franchise is floundering. As a result, both revenue and earnings are falling.

A small acquisition wouldn't be enough to turn things around for Gilead. That's why so many people have looked at Incyte as a potential solution. Incyte's cancer drug Jakafi could hit peak sales in the vicinity of $3 billion. If approved, Incyte's epacadostat could bring in another $1.6 billion. Incyte's autoimmune disease drug baricitinib, which it licensed to Lilly, might generate $1.8 billion in peak sales. 

But as good as adding Incyte's products would be for Gilead Sciences, adding Celgene would provide significantly greater growth. Revlimid alone generates higher annual sales than analysts' projections for Jakafi, epacadostat, and baricitinib combined. Celgene expects to grow total revenue from roughly $13 billion this year to more than $21 billion by 2020. That's the kind of growth that would make a huge difference for Gilead and radically change the story for the embattled biotech.

Going big, very big

Celgene's current market cap of $97 billion is nearly three and half times bigger than Incyte's market cap. Celgene is even larger than Gilead itself. Is it even remotely possible that Gilead could afford to buy Celgene?

The key factor would be how much of a premium would be required above Celgene's current price. Johnson & Johnson is paying a 23% premium to buy Actelion. That wouldn't be close to what it would take for Gilead to land Celgene, though.

As a Celgene shareholder, I think I'd be happy to get an immediate 40% premium above the stock's current price. Let's assume that Gilead could theoretically buy Celgene for somewhere in the neighborhood of $135 billion.

For sure, Gilead doesn't have enough cash to pay that kind of money outright. However, the big biotech does have more than $32 billion socked away. That would make a nice down payment. However, Gilead would have to borrow a little over $100 billion to seal the deal in this hypothetical scenario.

I think that the combined companies could service a debt load of that massive size. Gilead made $13.5 billion in profit last year. Celgene earned around $2 billion. Although Gilead's earnings are declining, Celgene's earnings are growing. There would also no doubt be some significant synergies to be obtained from a merger, which would help in paying down the debt.

Could it happen?

Could Gilead Sciences stun everyone with a deal this huge? It's at least possible. There have been mergers of near-equals in the biopharmaceutical world in the past. Gilead is desperate to change the impression that the market has currently. Joining forces with Celgene would certainly accomplish that objective.

But is such a move likely? Probably not. At the RBC Capital Markets conference held in February, John Martin said that "not every company wants to sell," adding that "many don't." I suspect Celgene would be in that group.

It is an intriguing thought, though. A Gilead-Celgene merger would create the most dynamic entity the biotech world has ever seen. I'd love to see how such a staggeringly audacious alliance might play out.

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Stocks Mentioned

Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$62.21 (-0.99%) $0.62
Celgene Corporation Stock Quote
Celgene Corporation
Incyte Corporation Stock Quote
Incyte Corporation
$75.63 (-2.24%) $-1.73

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