Speculation Heats Up on Whether a Spin-Off Could be in Gilead's Future
August 2, 2016
By Mark Terry, BioSpace.com Breaking News Staff
Analysts and investors have been speculating on Gilead ’s future strategies for a while. The speculation grew a little more heated recently after the company’s six-month financial reporting, which showed total revenues by June 30, 2016 of $7.8 billion compared to $8.2 billion in 2015.
One idea floated recently is that the company spin off its hepatitis C division. In the second quarter of this year, it showed an 18 percent drop in sales year-over-year, primarily from its three HCV drugs, Harvoni, Sovaldi and Epclusa.
“We find that spinning off HCV would help Gilead’s long-term growth profile—which could improve sentiment—though there would still be earnings lumpiness in the underlying HIV business, which could weigh on the multiple,” wrote Brian Abrahams, an analyst with Jefferies LLC, in a note to clients.
Of course, there has also been speculation that Gilead might either become an acquisition target, or buy one or several smaller companies, a so-called “string of pearls” strategy.
“The outstanding question about Gilead now is what it does next,” said Geoffrey Porges, an analyst with Leerink, in a note to clients. “With nearly $20 billion in operating cash flow, and close to $17 billion in free cash flow, it has plenty of opportunities. So far, its internal pipeline does not seem to have the scope, or probability of success, to materially improve its outlook or offset what increasingly looks like a steadily eroding mountain of HCV revenue.”
Late last month, Todd Hagopian, founder of a biotech fund, Marketocracy, told Ken Ham, a contributor to Forbes, that he thought Merck & Co. should consider buying Gilead. “They are suffering from an extremely low growth rate,” Hagopian told Forbes, “and they need to target something dramatic to convince the market they deserve their current valuation levels.”
Merck entered the HCV market in 2014 when it bought Idenix Pharmaceuticals for $3.85 billion, but got beat up by Gilead. Hagopian said, “Merck likely got a taste for how longer, and how profitable the market for hepatitis is at this point. By combining their own pipeline with Gilead’s, along with expanding into the hepatitis B market that Gilead is pursuing, this is the type of game-changing acquisition that Merck needs.”
More analysts tend to think Gilead should acquire smaller companies, especially small to mid-cap companies that have new drugs and interesting pipelines. Gilead has shown some interest in pushing into the oncology market. Abrahams suggests acquisition targets for that arena as Incyte Corp. , based in Wilmington, Delaware, and Boston-based Vertex Pharmaceuticals .
Some have mentioned San Francisco’s Medivation , which has booming prostate cancer drug, Xtandi, and several very promising pipeline drugs, including talazoparib for advanced breast cancer patients who have BRCA mutations. Medivation is currently the target of a hostile takeover bid by Paris-based Sanofi .
“I don’t think that Gilead is the best for Medivation,” said Michael Yee, an analyst at RBC Capital, in an interview with The Street. “They don’t have a solid tumor presence to make that work. They would be better suited to look to build better oncology assets elsewhere.”
Bret Jenson, writing for Seeking Alpha back in March, suggested possible Gilead acquisition targets, including Berkeley, California’s Dynavax Technologies Corp , which focuses on infectious diseases, autoimmune and inflammatory diseases, and oncology. He also floated Kite Pharma , based in Santa Monica, California, which is a leader in CAR-T immuno-oncology. Hagopian also suggested Gilead acquire Kite. Particularly when the stock recently dropped after competitor Juno Therapeutics had a clinical hold placed on its own CAR-T trial after three patient deaths, which cast a shadow over Kite.
“Due to Juno’s stumble,” Hagopian said, “Kite is poised to be the first CAR-T competitor to the market, potentially years in front of its next competitor, which will allow them to become the Gilead of this particular aggressive new oncology market. Kite would likely cost just over $3 billion to acquire.”