AstraZeneca ‘probably couldn’t run Gilead any better:’ analyst

AstraZeneca and Gilead are both staying tight-lipped over rumoured merger talks, but the consensus among analysts seems to be that there would anyway be little value in such a deal.

On Sunday, Bloomberg said undisclosed sources suggested AZ had made an overture to Gilead to gauge its responsiveness to what would be the biggest merger in pharma history, and the report has inevitably sparked a lot of debate about the pros and cons of such an alliance.

On balance, the majority of analysts commenting on an AZ/Gilead merger seem to be sceptical about the chances of it coming to fruition, even without the logistical nightmare posed by complex negotiations during coronavirus lockdown.

The last year or so has seen the mega-merger return to vogue in the biopharma sector with deals like Bristol-Myers Squibb’s $74 billion takeover of Celgene and Takeda’s $64 billion acquisition of Shire.

That has led some to speculate that a period of consolidation may take place in the industry to beef up pipelines, cut operating costs and spread R&D risk, after a number of stalled deals a few years back – including Pfizer’s aborted attempt to take over AZ in 2014.

Since then one of the key drivers behind mergers has started to resolve, namely the weakness many companies – and particularly AZ – suffered as a generation of big-selling products succumbed to generic competition, while biopharma companies have been buoyant with boosted valuations.

SVB Leerink’s Geoffrey Porges notes that large biopharma deals “arise from a position of distress, not strength”, and on that front that Gilead is “far from distressed.”

The biopharma’s share price has risen sharply this year thanks to its high-profile work in COVID-19 with remdesivir, pipeline-boosting deals with Galapagos and Arcus under new CEO Daniel O’Day to diversify into new areas, plus strong cash flow and profit generation from its HIV franchise.

“It seems unlikely that AZ, or any other pharma acquirer, could operate the business more efficiently,” says Porges. Meanwhile, AZ is also in the ascendency thanks to a clutch of new cancer drugs that are driving buoyant sales growth.

Porges also notes that the UK drugmaker’s interest in Gilead may suggest CEO Pascal Soriot wants to capitalise on its current position of strength “by making a large acquisition to diversify away from [its] dependence on its blockbuster oncology franchise”.

Jefferies’ Michael Yee meanwhile thinks Gilead’s reluctance to deviate from its current strategy of bolt-on deals stems from its belief that its HIV business is “underappreciated” by investors.

He also thinks a big merger would cut across O’Day’s plans, given he is only 15 months into running the company and his strategy is still being played out. Furthermore, Gilead is still working out what will happen with remdesivir, leading the pack among drugs to treat COVID-19.

While it is initially being provided for free the promise of a profitable business lies ahead, though like Gilead’s hepatitis C virus franchise of a few years back it could be fairly short-lived. AZ meanwhile is making a big play in coronavirus via its vaccine partnership with Oxford University, but has already said it won’t seek to make a profit from the venture.

There are reportedly already signs that AZ is retreating from its rumoured position anyway, with an article in The Times – that also cites undisclosed sources – saying that has ruled out a deal because it would distract from developing its own pipeline.

Overall, AZ and Gilead have little in common when it comes to product portfolios and strategy and while that means there’s little overlap – with Gilead’s cancer pipeline still speculative at best – cost-saving opportunities would also be reduced.

Gilead’s antiviral drugs do provide plenty of cash flow however, which AZ could do with despite serially selling off assets in recent years to reinvest in R&D. And there’s a recent precedent for that sort of deal – BMS/Celgene is a prime example of a merger driven by cash, rather than pipeline.

Overall however, the depressed economic outlook caused by the pandemic may in itself be a spurt for mega-mergers as a path to growth, according to London Capital Group’s Jasper Lawler.

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