The pharmaceutical industry is undergoing an unprecedented amount of consolidation right now due to an influx of cash from several new classes of drugs and the need to replace former blockbusters that have lost patent protection. Interestingly, though, most deals so far have been relatively small or mid-sized in nature, such as Celgene's recent buyout of Receptos for $7.2 billion, with the only super-sized deals being Actavis' $66 billion merger with Botox-maker Allergan and the recent buyout of Allergan's generics unit by Teva Pharmaceutical for $40.5 billion.
But that doesn't necessarily mean that big pharma, or big biotech for that matter, lack an appetite for megadeals. After all, Pfizer (NYSE:PFE) attempted to take out AstraZeneca (NYSE:AZN) last year in what would have been one of the richest buyouts in the industry's history.
Despite picking up a handful of small to mid-sized companies since its failed Astra bid, Pfizer still has more than enough cash to go after another big pharma. And Gilead Sciences (NASDAQ:GILD) is rapidly building a tremendous cash reserve that could lead to its biggest move on the M&A scene to date. Most importantly, though, both of these cash-rich companies need to make a deal for a company with products already on the market, ideally one with a foreign address for tax purposes.
That's why there have been rumblings from various corners of the Street that Astra and Bristol-Myers Squibb (NYSE:BMY) might be on the respective radars of Pfizer and Gilead. Given that these rumors have been somewhat persistent over the last year or so, I think it's worthwhile to take a deeper look at these possibilities and consider their likelihood moving forward.
Astra comes with a foreign address and a robust immuno-oncology pipeline
Pfizer's reported interest in Astra was due to both the British pharma's tax-advantageous address and its emerging immuno-oncology pipeline, which may take the "best-in-class" honors when all is said and done. Despite getting a late start, Astra currently has 10 ongoing late-stage trials in its immuno-oncology pipeline that are expected to lead to several regulatory filings within the next 12-months.
A deeper dive, though, shows that Astra's main focus in the immuno-oncology space has been lung cancer, where it has one of the most diverse immunotherapy programs in existence. That's important to keep in mind, because lung cancer makes up about 13% of all cancers in the U.S. at present and is an extremely deadly form of the disease. As such, the non-small cell lung cancer market alone is expected to grow to a staggering $7 billion opportunity for drug makers by 2019.
Aside from immuno-oncology, Astra has built a strong diabetes franchise, headlined by products such as the Bydureon pen device and the SGLT-2 inhibitor Forxiga. Together these two products helped to generate a 47% increase in year-over-year sales to $488 million in the first quarter of this year.
The main roadblock for any potential suitor, however, is Astra's potential price tag. With a market cap that presently tops $80 billion, it's not hard to imagine that a tender offer would have to come in at around $100 billion for the company's management to take the bid seriously. After all, management wasn't exactly excited by the prospects of selling out to Pfizer last year, and it firmly believes that the company's clinical pipeline can return it to growth by 2017.
Bristol's pivot toward immuno-oncology makes it an intriguing buyout candidate
Bristol has been one the big pharmas to emerge quickest from the wreckage of the patent cliff due to its vast downsizing efforts and the blazing speed at which its lead immuno-oncology product, Opdivo, has progressed through clinical trials. Opdivo has already garnered two regulatory approvals for advanced melanoma and non-small cell lung cancer, and appears close to a third in metastatic kidney cancer after the drug's pivotal trial was stopped early for efficacy.
The key point is that Opdivo has the potential to generate upwards of $6 billion in peak sales, according to some analysts' estimates. That's a game-changer for most, if not all, companies in terms of top-line growth, which is why Bristol's name has repeatedly surfaced on the buyout rumor mill. In terms of a link to Gilead, analysts have noted that the biotech has been building out its oncology pipeline of late -- and buying Bristol would dramatically accelerate this effort.
Beyond Opdivo, Bristol also has a somewhat under-appreciated HIV franchise consisting of Evotaz and Reyataz, and a handful of experimental candidates that the company hasn't put much weight behind because of its all-in approach to immuno-oncology. The point is that, in the right hands -- such as Gilead's, for instance -- these overlooked HIV products could provide significant upside in terms of value creation.
Like Astra, though, Bristol's market cap of nearly $115 billion makes a buyout scenario hard to fathom. Any suitor -- especially Gilead -- would probably end up having to take on boat loads of debt to make a deal work, potentially torpedoing any latent value created by the merger.
Do these buyout rumors have legs?
I think the fact that both Pfizer and Gilead have openly admitted that they are in the hunt for additional deals has gotten everyone's imagination working overtime. At the end of the day, Pfizer wasn't able to pull off a merger with Astra last year because Astra's management simply wasn't that interested, and little seems to have changed since then. Bristol would also have little to gain from selling now, given that its long-term strategy to reorganize is going even better than expected in many ways. Put simply, Astra and Bristol would probably require massive premiums to convince their management teams to jump ship now, and their huge market caps likely preclude that from happening. So I personally expect Pfizer and Gilead will look elsewhere for their next big acquisitions.