Although Gilead Sciences, Inc. (NASDAQ:GILD) has seen significant success in its HIV and HCV franchises, in Bank of America Merrill Lynch’s view its pipeline is insufficient to address faster-than-expected decline in HCV sales. Investors seem to expect Gilead to conduct acquisitions to return to growth. Meanwhile, management has reiterated M&A as a top priority. Herein the firm provides M&A analysis on widely reported targets including Incyte, TESARO, Clovis, Vertex and Bristol-Myers (as per reports from Bloomberg, Forbes, Nasdaq, and Biospace).
Despite slower growth in current revenue streams, Gilead generated $16B in free cash flow in 2016 and substantial cash flow is expected in coming years. Based on its analysis, BAML believes Gilead can lever up to 4x pro forma EBITDA for acquisitions and could de-lever with future cash flow as well as potential cash repatriation from overseas. By YE16, Gilead reported $32.4B in cash, including $27.4B held overseas.
Despite multiple setbacks in oncology development, Gilead has reiterated its focus on oncology. As such, the firm believes reported targets Incyte, TESARO, Clovis and Bristol-Myers could be potential candidates for Gilead. Specifically, Incyte's epacadostat (IDO inhibitor), Bristol-Myers Opdivo (anti-PD-1 antibody), TESARO’s Zejula and CLVS’ Rubraca (both PARP inhibitors) will likely play significant roles in the oncology space. Vertex, on the other hand, as a rare disease company specialized in cystic fibrosis, could generate significant future cash based on approved Orkambi and Kalydeco, as well as triple combinations for a larger market.
Based on consensus, Gilead revenue is declining at a 2% CAGR from 2018-2021. BAML believes a potential deal with Incyte, TSRO, Clovis, Vertex or Bristol-Myers would not be sufficient to return Gilead's growth to its previous level, given limited near-term revenue contribution from these targets. Based on the firm’s scenario calculations, Bristol-Myers would contribute the most, bringing potential combined revenue growth to a 2% CAGR over 2018-2021. However, a potential transaction with Bristol-Myers would be the most dilutive (15.2% dilutive in 2018) while Vertex would be the most accretive (4.1% accretive in 2018).