The first step toward solving a problem is admitting you have one. Color me cynical, but hiring the head of Roche's pharma division seems like an admission of guilt from Gilead Sciences (NASDAQ:GILD). Daniel O'Day will step down from a lead role at Roche's pharmaceutical division to become CEO and chairman of Gilead in March.

At Roche, O'Day instinctively directed one of the industry's largest R&D budgets away from CAR-T and other cellular cancer therapies while Gilead and its peers were drawn to amazing efficacy results like moths to a flame. As O'Day foresaw, Gilead's $12 billion gamble on cellular cancer treatments hasn't worked out nearly as well as expected.

The new CEO will have plenty of cash to explore new directions. Here's why these three biotechs could be the next ones scooped up by Gilead.

Company (Symbol) Recent Market Cap Key Asset
Exelixis (NASDAQ:EXEL) $6.6 billion Cabometyx
Clovis Oncology (NASDAQ:CLVS) $1.1 billion Rubraca
Gritstone Oncology (NASDAQ:GRTS) $719 million GRANITE-001

Data source: Yahoo! Finance.

Exelixis: Cosmic connection?

Launching a new drug isn't easy, and independent biotechs tend to underperform their larger peers. Cabometyx from Exelixis earned its first approval back in 2012, and sales have surged since it became a first-line treatment for the most common form of kidney cancer. 

Although Cabometyx sales have accelerated in recent years, net product revenues reached just $443 million during the first nine months of 2018. Don't be surprised if O'Day thinks the drug can live up to blockbuster expectations under the wing of Gilead's larger sales force.

Exelixis isn't cheap, but the stock has fallen far enough that Gilead can probably scoop up every share without breaking the bank. At the end of September, Gilead boasted $28.5 billion in cash and securities. 

Despite the recent entry of rival therapies, Cabometyx tablets appear to be holding up well in the kidney cancer indication against a combination of Yervoy and Opdivo. Also, an approval decision that could expand the drug's addressable population to include patients with liver cancer is expected from the U.S. Food and Drug Administration by Jan. 14, 2019. With peak sales that could reach $2 billion in a few short years, Exelixis looks like a sensible purchase for Gilead.

Tiny shopping cart full of pills on a pile of money.

Image source: Getty Images.

Clovis Oncology: Another big PARP player?

GlaxoSmithKline recently agreed to pay $5.1 billion for Tesaro, another struggling biotech in the middle of its first drug launch. Clovis Oncology's lead drug, Rubraca, is from the same class as Tesaro's first-time cancer treatment, and there's a chance that O'Day could be persuaded to believe Gilead can make Rubraca into a blockbuster drug.

Rubraca's one of several PARP inhibitors approved to prevent ovarian cancer tumors from returning after they've been hammered by standard chemotherapy. This second-line indication is already crowded with Zejula, from GlaxoSmithKline, and Lynparza, another PARP inhibitor marketed by Merck in partnership with AstraZeneca.

Down the road, Rubraca will probably have to compete with another industry heavyweight: Pfizer's PARP inhibitor Talzenna recently earned approval to treat breast cancer patients.

Early stage clinical trials suggest PARP inhibitors could play a role in treating prostate cancer and other malignancies. Fear of competition for ovarian cancer patients has driven Clovis Oncology's shares down 69% in 2018. That might be just low enough to tempt Gilead into taking a chance at expanding Rubraca's addressable patient population.

Prescription drugs on top of hundred dollar bills.

Image source: Getty Images.

Gritstone Oncology: Something new

Gritstone Oncology wasn't even a publicly traded company a few months ago, but don't be surprised if Gilead Sciences gobbles it up early next year. The cancer-focused biotech is taking an exciting approach to immunotherapy that might appeal to O'Day's sensibilities.

Growing tumors develop heaps of neoantigens that can be recognized by T cells, but drugmakers initially ignored neoantigens because there are just too many and no single one pops up frequently enough to make a drug. Gritstone's proprietary EDGE platform allows manufacturers to assess a patient's tumor-specific neoantigens (TSNAs) from a biopsy sample. The company's lead candidate, GRANITE-001, is a personalized virus that should incite a patient's immune system to attack multiple TSNAs all specific to their tumors.

Although GRANITE-001 will be custom-made for each patient, in the second half of 2019, Gritstone plans to begin studies with an off-the-shelf version containing TSNAs shared across patient subsets. It's extremely early, but an off-the-shelf approach that can get the immune system to attack tumors specifically could be worth billions.

Play it safe

Although these smaller biotechs could become the object of an upcoming acquisition from Gilead Sciences or a different suitor, hope for a buyout offer on its own isn't a great reason to buy any stock. A good rule of thumb is to make sure you'd feel comfortable owning the business regardless, that way you're less likely to get burned.

Cory Renauer owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Exelixis and Gilead Sciences. The Motley Fool has a disclosure policy.