The pharmaceutical industry underwent a widespread consolidation last year, triggered by record profits for some mid- to large-cap companies like Actavis, as well as falling revenues for big pharmas like Merck & Co.
As these conditions are in still in play and big pharma is staring down another $65 billion in losses due to patent issues over the next four years, there is a good chance the merger and acquisition frenzy will continue in 2015.
Gilead Sciences (NASDAQ:GILD) has been a regular player on the M&A front since CEO John Martin took the reigns back in 1996, helping to create one of the best product portfolios and clinical pipelines in the business. And this trend continued recently with the purchase of privately held Phenex Pharmaceuticals for its liver disease drug development platform for a reported $470 million.
With a premier HIV franchise at its core and a rapidly developing liver disease franchise in hand, Gilead is on track to post double-digit revenue growth for years to come. Such stellar growth, though, may be blood in the water for big pharmas struggling in the wake of the patent cliff, perhaps turning Gilead into a compelling takeover target.
With this in mind, let's consider if Gilead is indeed ripe for a buyout offer and who might consider making a tender offer.
Gilead's amazing growth stemming from its HCV franchise and key HIV drugs like Stribild make it relatively cheap on a valuation basis. Unlike most of its peers in the biotech industry, Gilead's shares actually trade at a highly compressed forward price-to-earnings ratio at 9.88, compared to a sector average that tops 24.
After striking a deal with CVS Caremark that secured preferred reimbursement status for its HCV drugs and essentially shut out competitor AbbVie's Viekira Pak, Gilead's top-line growth should remain strong in the months ahead.
Although its HIV franchise has been overshadowed by the launch of Sovaldi and Harvoni, this business would still be a key asset for any potential buyer. Right now, the franchise sports a whopping five blockbusters! To top it off, newer drugs like Stribilid and Complera/Eviplera have seen sales absolutely skyrocket over the past year.
Gilead also offers a top-notch clinical program with ongoing studies for six potential blockbuster indications, such as nonalcoholic steatohepatitis, blood-based disorders, and others. The acquisition of Phenex Pharmaceuticals adds to this amazing pipeline, and makes Gilead a leader in the field of liver disease research.
The downsides for a potential buyer
The main downside is that Gilead is a monster company already, with a market cap that exceeds $147 billion, making it the fifth most valuable public healthcare company in the world. As such, a buyout would require a boatload of cash, and perhaps the express interest of Gilead's management in a merger.
Who might be a player for Gilead?
Because of Gilead's sheer size, there are only four legitimate companies to consider as possible suitors, namely Novartis AG, Pfizer, Johnson & Johnson, and Merck. Right off the bat, J&J looks like a no-go because it tends to stick to small biotechs (> $1 billion in market cap) acquisitionwise; an acquisition of this size would be really out of character. Novartis has also rarely pursued megadeals, and additionally doesn't have many overlapping therapeutic interests with Gilead.
That leaves Pfizer and Merck. The problem, though, is that Gilead isn't a good fit productwise for either of these big pharmas right now. Both Pfizer and Merck have been focusing more on vaccines and oncology products lately, meaning there would be few, if any, synergies created by a Gilead buyout.
At the end of the day, Gilead's behemoth market cap is simply too rich for the companies that would benefit from a buyout, presumably keeping this high flying biotech squarely on the "acquirer" side of the M&A ledger going forward.
George Budwell owns shares of Gilead Sciences. The Motley Fool recommends Gilead Sciences and Johnson & Johnson. The Motley Fool owns shares of Gilead Sciences and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.