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Is Gilead Sciences an Acquisition Target?

By George Budwell - Feb 11, 2020 at 9:33AM

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Gilead's depressed valuation has been sparking acquisition rumors.

Gilead Sciences(GILD 0.80%) latest earnings report and full-year outlook didn't exactly inspire confidence among investors last week. The biotech heavyweight told the investing community a week ago today that its top line will likely dip yet again this year thanks to falling hep C drug sales and the slower-than-expected commercialization of its anti-cancer cell therapy Yescarta.

Wall Street, for its part, is even less optimistic about the big biotech's near-term prospects. The average analyst estimate has the biotech's annual sales declining for the next two full years. That's a surprising take to be sure, given the strong possibility that Gilead's blockbuster-in-waiting, filgotinib, will likely hit the market soon.  

The big deal is that the biotech's market capitalization has been bumping up against its five-year low lately thanks to this rather anemic outlook. In response, Jefferies' analyst Michael Yee published a note last week suggesting that Gilead might now be an attractive takeover target. Its large-cap biopharma peers Allergan and Celgene, after all, both turned into top acquisition targets when their respective market caps bottomed out. 

Wooden blocks that spell "buy-out" surrounded by piles of coins

Image source: Getty Images.

Is a possible takeover reason enough to buy Gilead's stock right now? Let's take a deeper look to find out.

Gilead's takeover thesis isn't compelling

The main reason shareholders should mull over this idea is that Gilead's management would obviously demand a healthy premium in a takeover scenario. In fact, it would most likely require a 30% premium -- at a bare minimum -- to win over the biotech's brain trust. That's a decent payday for the biotech's long-suffering shareholders, to be sure. Unfortunately, we'd be looking at a deal valued at no less than a monstrous $115 billion at those levels. 

When it comes to acquisitions, size most definitely matters. After all, the only two American mega-pharmas that could possibly swallow Gilead whole are Johnson & Johnson (JNJ 1.46%) and Pfizer (PFE 3.00%). While J&J has some noteworthy synergies with Gilead's clinical pipeline and product portfolio, the Band-Aid maker isn't exactly known for mega-mergers of this size. What's more, J&J is one of the few large-cap biopharmas that doesn't really have a glaring hole to fill via M&A. So, there's no particularly good reason to think that J&J would be willing to place undue stress on its nearly pristine balance sheet in order to gobble up Gilead. 

Pfizer doesn't come across as a likely suitor, either -- for a multitude of reasons. Chief among them, the pharma giant recently announced plans to slim down to unlock the latent growth potential of newer products such as breast cancer medication Ibrance. Pfizer does reportedly have interest in pursuing additional bolt-on acquisitions to flesh out its emerging growth portfolio. But the company seems intent on sticking to small-to-mid-sized deals to achieve this key operational goal. Pfizer and Gilead also don't share a whole lot of clear-cut synergies. As such, it's hard to imagine that Pfizer would have any serious interest in buying Gilead, either. 

What's next?

Gilead is almost certainly not going to be the next Allergan or Celgene. The long and short of it is that the big biotech is still far too large to be consumed by one of its peers, despite its prolonged trough period. So, if you're hoping for a quick buck on a buyout scenario, you might want to look elsewhere. Gilead simply doesn't fit the bill.  

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Stocks Mentioned

Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
GILD
$63.08 (0.80%) $0.50
Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$51.59 (3.00%) $1.50
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$182.29 (1.46%) $2.63
Allergan plc Stock Quote
Allergan plc
AGN

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