M&A activity is seeing a noticeable uptick to start the year compared to a punk 2016 for transactions.
Several notable purchases have already occurred in January. However, Gilead Sciences which is being pushed hard by analysts and investors to make a splash in M&A, remains sidelined.
Based on management comments, here are two acquisition targets that would make logical and strategic sense for the biotech giant.
"The perils of duck hunting are great - especially for the duck." - Walter Cronkite
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The long anticipated purchase of Europe's largest biotech company by Johnson & Johnson (NYSE:JNJ) is finally happening as the company has come to terms to acquire Swiss based Actelion for some $30 billion. This is by far the largest M&A deal within the sector so far this year. However, we have had two other deals in the $5 billion to $10 billion range so far in January and M&A does indeed to be picking up from the punk levels of 2016. This was one of the three key reasons I thought "Why Biotech Will Rebound In 2017" which I published to start the New Year. I continue to believe so.
As a long suffering shareholder of Gilead Sciences (NASDAQ:GILD), I know I'm thinking what most of my fellow stockholders are feeling right now. When is Gilead going to put some of its massive free cash flow to use and get in the M&A game? This is something shareholders and analysts have been pushing the biotech giant to do for over a year now. Both to find a growth engine outside of its core HIV and HCV franchises and change the market narrative around only its declining hepatitis C drug sales.
The company has consistently insisted that it is looking at a variety of deals in the $1 billion to $5 billion range, although Gilead owners and analysts would probably do something bigger. Provided the company sticks to its guns but does make a move in the first half of 2017, the obvious focus areas based on management comments would be in oncology or NASH.
Given these parameters, these are two possible targets that would make sense for Gilead.
If the company decides to expand in oncology, Exelixis (NASDAQ:EXEL) would make sense although it would cost it a bit more than its desired range as it already has achieved a $5 billion market capitalization without considering a buyout premium. It also is a much speculated acquisition target and rose in empathy when fellow mid-cap oncology concern ARIAD Pharmaceuticals (NASDAQ:ARIA) was taken out earlier this month for a 75% premium.
At $18 a share, EXEL certainly is not as cheap when I was buying it at just over $4.50 a share for the Growth Stock Advisor portfolio last May, but still could be a logical fit for Gilead. At this point, Gilead's shareholders might forgive it for overpaying a bit to make an acquisition and change the narrative and sentiment on its beaten down stock.
Exelixis' main asset is Cabometyx which was approved by the U.S. Food and Drug Administration as a therapy for advanced renal cell carcinoma which were previously treated with anti-angiogenic therapy. Despite just being launched in the second quarter of last year, Cabometyx has captured more than a third of the market for that indication. There is also good reasons to believe over time its label will be expanded to similar type conditions. For a full run down of some of these details, read this recently published article.
When the company last reported earnings on November 3rd, Cabometyx made up approximately 75% of its $42.7 million in product revenue which was up from under $7 million in the year ago period thanks to the impressive rollout of Cabometyx. Purchasing Exelixis, while costly, would dramatically expand Gilead's footprint in the oncology space and give it a potential blockbuster oncology drug as well.
Moving on to NASH, Genfit SA (OTCPK:GNFTF) might fit the bill. This is a French based biopharma focusing on developing therapeutic and diagnostic solutions to address high unmet patient needs in metabolic and inflammatory diseases with a focus on the liver and gastroenterology.
Genfit has a market capitalization of approximately $750 million and with a decent buyout premium would easily fall into Gilead's desired "Buy" range. The company is developing a variety of biomarkers, but the main asset that Gilead would be interested in is the company's primary drug candidate Elafibranor, also known as GFT505.
The company is hoping to show that Elafibranor reverses nonalcoholic steatohepatitis {NASH} to prevent fibrosis progression. In Phase II trials the compound showed a solid safety and tolerance profile and provided needed cardio-protective benefits.
Elafibranor is currently being evaluated in the clinical Phase 3 study called RESOLVE-IT. This pivotal study aims to achieve conditional marketing approval based on the interim analysis of the first 1,000 patients based on a single histological surrogate endpoint.
In February 2014, the FDA granted Fast Track designation to elafibranor in NASH. The trial commenced late in 2015 and should be due to disclose a 72-week interim analysis from this pivotal study sometime this summer.
Obviously, betting on elafibranor is a riskier proposition than on Cabometyx as it has not been approved. However, given the huge potential market for NASH treatments; I believe it is a risk Gilead should take. Given the company has produced over $20 billion in free cash flow in the past five quarters, it could easily afford one or both of these logical acquisitions. The question for shareholders is whether Gilead will soon take the opportunity to change the narrative around the company and its stock.