- Gilead needs to diversify. 90% of 2014 sales came from HCV products.
- Gilead issued senior unsecured notes to raise $10 billion, which may hint at a large-scale acquisition.
- It is more lucrative for Gilead to ignore smaller-cap names to go after a large-cap company.
- There are many synergies to be realized in the acquisition of Bristol-Myers.
- From Gilead's acquisition of Pharmasset, investors know that management is comfortable acquiring a company using a combination of debt, unsecured notes, and cash.
It's no secret that Gilead Sciences (NASDAQ:GILD) can, and needs to, make an acquisition. There are plenty of articles on Seeking Alpha that make a strong case for Gilead's ability and necessity to dip its toe back into the M&A market. However, constant speculation has yielded a whole lot of nothing.
My previous candidates for a takeout were Intercept Pharmaceuticals (NASDAQ:ICPT), Progenics Pharmaceuticals (NASDAQ:PGNX), and Anthera Pharmaceuticals (NASDAQ:ANTH). The former has a market cap of around $4.5 billion, while the latter two have market caps of less than $500 million. All three have enormous potential but may not be worth Gilead's dime. Acquiring a company of greater magnitude would open many, more lucrative doors to Gilead. In my opinion, Gilead does not need to roll the dice and acquire companies whose success largely lies in Phase III drugs -- such as the ones listed above -- when it can overtake an established company with many drugs in its pipeline and already on the market.
Gilead's Q3 earnings report told investors that the company is sitting on $25.1 in cash and cash equivalents (up from $14.7 billion in Q2 largely due to the issuance of $10 billion in senior unsecured notes in September). To me, the large-cap name that makes the most sense is Bristol-Myers Squibb (NYSE:BMY). I believe the potential synergies make this deal attractive to both companies, and Gilead has the capacity to make an enticing offer.
Before I discuss why it should be Bristol-Myers, allow me to explain why it is so important that Gilead pulls the trigger at all. We know that the company has the cash to support a deal. That's the can aspect. Theneed component is completely different animal.
Gilead is almost entirely dependent on its HCV pipeline for its revenue and earnings. More than 90% of Gilead's 2014 product sales came from its HCV drugs. Specifically, about 41% of revenue came from Gilead's HCV darling Sovaldi. While this is sustainable in the present and near future, this may not be the case for long. There are worries of slowing Hepatitis C prescription growth, and investors worry that Merck's (NYSE:MRK) entry into the Hepatitis C market in early 2016 will take market share from Gilead. To ensure stability in the future, Gilead needs to diversify now.
This is what Bristol-Myers brings to the table. The company has a large and well diversified product line, with products beginning with virtually every letter of the alphabet and treating schizophrenia, bipolar disorder, and depression to melanoma. In its pipeline, there are over 20 drugs in phase I, six in Phase II, and four in Phase III. Gilead has eight Phase I drugs, 16 in Phase II, and nine in Phase III. Of course, most of the drugs in Phases I & II will not make it to market, but the high amount of Phase I drugs that Bristol-Myers brings to the table could be key to unlocking years of a diversified pipeline. Like I said: if Gilead wants to ensure stability in the future, it must diversify now.
Zoom in on Bristol-Myers' pipeline, and you'll see that the company has a strong presence in the oncology and immuno-oncology markets. Immuno-oncology is an innovative form of cancer treatment. This area of research seeks to help the body's immune system fight cancer, rather than removing it or treating it with chemotherapy. Bristol-Myers' website has a great analogy that contrasts immuno-oncology with other forms of cancer treatment. For patients with advanced cancers and ones that have spread throughout the body, immuno-oncology can be the solution to these hard-to-treat problems.
The immuno-oncology market is predicted, by Leerink Partners analysts, to be a $40 billion market ten years from now. This fact is not unknown to John Martin, CEO of Gilead, whose company has no current exposure to immuno-oncology; eventually, Gilead will make its way into this segment of the market. However, taking over Bristol-Myers would give Gilead immediate entry into the immuno-oncology space, allowing the combined company to become the leader.
The $113 billion company is currently... read the remaining 596 words of this article, absolutely free, on my website -- simply click here.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.