Gilead should buy Vertex, analyst suggests–and the time is now

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While pharma’s been riding its deal wave, Gilead’s ($GILD) been off on its own, coasting on new revenue from blockbuster hep C launches Sovaldi and Harvoni. But one analyst thinks the time is ripe for it to get in on the M&A action–and he’s tabbed Vertex ($VRTX) as a prime target.

The way Bernstein analyst Geoffrey Porges sees it, Gilead’s going to need some top-line assistance when its primary drug franchises–HIV and hep C–hit trouble in 2017. Between an upcoming patent cliff for HIV med Viread and incoming hep C competition from Merck ($MRK), Porges sees 30% to 40% of the California company’s revenue going down the tubes between 2017 and 2021.

That’s a situation it can better, though, if it gets some help in advance–and it has the means to do it now. “Gilead has an enormous surplus of near term cash flow” as well as “the opportunity to invest in strategic M&A before those threats come to fruition,” Porges wrote in a note to investors.

So why Vertex? Well, for starters, it’s slim pickings, he admits. As he notes, there are only 5 independent biopharma companies in the $10 billion to $35 billion market cap range in Medivation ($MDVN), Incyte ($INCY), BioMarin ($BMRN), Vertex and Alexion ($ALXN). And thanks to Vertex’ cystic fibrosis, he thinks makes the most sense for Gilead, which already has a product for the condition–Cayston–and commercial infrastructure in place.

That doesn’t mean Vertex doesn’t have its own hurdles ahead, too–but they’re hurdles Gilead knows how to clear, Porges figures. Vertex’s greatest challenges are in the development and commercialization of complex multi-drug combinations, which is “something Gilead knows a thing or two about,” he wrote.

Vertex will also be navigating a tricky payer landscape once it wins FDA approval for a new Kalydeco combo–expected to run at an orphan drug price despite a patient population potentially 10 times the size of its current pool. And with costly Sovaldi–and, now, Harvoni–Gilead is basically in the process of writing the book on how to help payers swallow a lofty sticker price.

So assuming Gilead does go Porges’ route, how would the deal look? The biotech could “easily absorb” the cost of buying vertex at a 50% premium on a 20% cash and 80% debt basis, Porges wrote, and he estimates a $45 billion acquisition could yield a 27% revenue increase for Gilead by 2020.

http://www.fiercepharma.com/story/gilead-should-buy-vertex-analyst-suggests-and-time-now/2015-04-22

 

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