Gabelli also sees Takeda as a potential candidate but thinks shareholders are likely unwilling to enter another merger
Bloomberg reported over the weekend that AstraZeneca (AZN) had made a preliminary approach toward Gilead Sciences (GILD) about a potential merger. However, according to CNBC’s David Faber, "nothing is happening" between the two companies. Discussing other potential candidates if Gilead is not available, Gabelli's Kevin Kedra said he sees Biogen (BIIB) and Alexion (ALXN) as "logical alternatives and potentially willing sellers should AstraZeneca come calling."
POTENTIAL MERGER APPROACH: According to a report by Bloomberg's Ed Hammond, Aaron Kirchfeld, and Dinesh Nair over the weekend, AstraZeneca made a preliminary approach to rival drugmaker Gilead Sciences about a potential merger that would become the biggest healthcare deal on record. The U.K.-based company informally contacted Gilead last month to gauge its interest in a possible tie-up, sources said. While Gilead has discussed the idea with advisers, no decisions have been made on how to proceed and the companies aren't in formal talks, the people added.
Meanwhile, CNBC's David Faber reported on Monday morning that the companies are not in merger talks. Several sources have indicated there is "nothing happening" between AstraZeneca and Gilead, Faber said on air, noting also that the U.K. Takeover Panel would require AstraZeneca to say something if talks were happening and the company has not issued a release.
OTHER POTENTIAL TARGETS: Commenting on the news, Gabelli analyst Kevin Kedra said that AstraZeneca and CEO Pascal Soriot appear ready to capitalize on market conditions and the recent strength in shares to make a sizeable, if not transformative, acquisition. While Gilead was the named target that kicked off this speculation, Kedra believes there are several other candidates that could provide meaningful scale, accretion, and diversification. Among a group of 11 potential targets with market capitalizations or enterprise values ranging from $20B-$100B, he sees Biogen and Alexion as "logical alternatives and potentially willing sellers should AstraZeneca come calling."
In examining what Gilead brings to AstraZeneca, the analyst identified seven criteria, namely a "mega blockbuster" franchise, first-year earnings per share accretion of 25%-plus, combined sales of $40B-plus in 2022, ex-U.S./EU sales below 15% of total, oncology assets, gene therapy assets, and a leading COVID-19 treatment.
The analyst argued that Biogen "checks nearly all the boxes," lacking only a major candidate for COVID-19. Like Gilead’s HIV franchise, Biogen's multiple sclerosis franchise includes several $1B-plus blockbusters and is led by Tecfidera, he noted, adding that Biogen is roughly half the size of Gilead in market cap, and a deal could offer the greatest accretion among potential candidates given the ability to fund the vast majority with debt financing. Kedra also highlighted that Biogen provides exposure to oncology through its anti-CD20 collaboration with Roche (RHHBY), though this is likely of minimal synergistic value to AstraZeneca since Roche handles most of the commercialization. Acquiring Biogen would require AstraZeneca to absorb two significant risks, he contended, namely Tecfidera's patent situation and Biogen's controversial late-stage candidate for Alzheimer's disease.
The analyst also sees Takeda (TAK) as a potential candidate that looks most similar to Gilead since it also "checks all boxes but one" as the company generates 18% of sales from its home country. Takeda has a similar enterprise value to Gilead due to $39B of net debt, but Kedra estimates a deal would be $15B cheaper due to the lower market cap. Takeda has a mega blockbuster with Entyvio for GI disorders, a stronger oncology presence than Gilead, and a $5B-plus orphan drug portfolio spanning multiple chronic rare diseases, he contended. However, with the company just over a year removed from closing an unpopular merger with a U.K.-based company, the analyst argued that Takeda and its shareholders are likely unwilling to enter another one. The geopolitical challenge of acquiring "Japan's 239-year-old pharmaceutical champion" would also likely be a non-starter for a potential deal unless Takeda were the surviving company, he added.
Several other companies check some of his boxes, but Kedra believes Alexion stands out as "the closest substitute" for Gilead. Aside from Takeda and Biogen, only Alexion offers both a mega blockbuster chronic therapy with the ultra-rare disease drug Soliris and the potential for 25%-plus accretion in the first year after closing, he noted. The analyst argued that while the company has no oncology presence, the pipeline offers some synergy opportunities with AstraZeneca's cardio/metabolic portfolio that accounts for approximately one-fifth of the latter’s sales. There is patent risk for Soliris, though Alexion recently settled with Amgen (AMGN) for a biosimilar launch in 2025, Kedra acknowledged. Working in favor of a deal is activist shareholder Elliott Management pushing for a sale of Alexion. Further, the analyst pointed out that acquiring a more bite-sized company like Alexion would give AstraZeneca the financial flexibility to also pursue a second similarly-sized target or several bolt-on deals in the $5B-10B range that focus more on pipeline and growth.
PRICE ACTION: In late morning trading, shares of AstraZeneca have dropped about 2%, while Gilead's stock has slid almost 3% to $74.14. Also lower, Biogen has slipped over 2% to $288.21, and Alexion has dropped more than 3% to $112.76.