AstraZeneca Ponders a Huge $240 Billion Gilead Gamble

(Bloomberg Opinion) -- There are good reasons for Britain’s AstraZeneca Plc to consider what would be the biggest pharmaceuticals deal in history by combining with U.S. peer Gilead Sciences Inc. They may not be good enough to offset the risks that go with mashing together drugmakers with a total market value of nearly $240 billion.

AstraZeneca approached Gilead last month, Bloomberg News reported Sunday, although there are no formal talks underway. Gilead discussed the possible tie-up with its advisers but isn’t interested in selling to a larger rival right now, Bloomberg News added.

From a purely strategic perspective, the attractions of this deal to AstraZeneca aren’t obvious. It already has an enviable pipeline of drugs in oncology, cardiovascular and respiratory disease. And it presented the most impressive data at the American Society of Clinical Oncology’s latest conference, says Bloomberg Intelligence analyst Sam Fazeli.

Meanwhile, Astra is helping Oxford University develop a coronavirus vaccine. It says it won’t profit from that during the pandemic, assuming the project is successful. But an annual jab against Covid-19 could be a source of future revenue.

These prospects are reflected in a share price that’s jumped 6% this year in dollar terms; Bloomberg’s global pharmaceuticals index has risen by slightly more than 2%. In sterling, AstraZeneca’s shares are 11% higher in 2020.

By contrast, Gilead’s pipeline isn’t so strong. Its best hope, the inflammation drug filgotinib, will enter the market after several direct competitors. Its efforts in fatty liver disease have been a disappointment so far, and the previous management team’s expensive gamble on acquiring Kite Pharma, a specialist in cancer cell therapy, hasn’t paid off. Daniel O’Day, Gilead’s new chief executive officer, has also acquired cancer biotech Forty Seven Inc. and struck a research partnership with Galapagos NV, which will both take time to bear fruit.

While Gilead’s remdesivir drug received emergency approval as a treatment for Covid-19 and has caught investors’ attention, its commercial prospects remain uncertain. 

The U.S. drugmaker does, however, have steady cash flow from its leading HIV drug franchise, plus a strong balance sheet. These would help address a relative weak spot for AstraZeneca: its finances. Its net debt is already roughly twice Ebitda (a measure of yearly profit). The group is having to sell stakes in promising drugs and bring in partners to co-fund research and development.

Last year’s collaboration agreement with Japan’s Daiichi Sankyo Co. to combat breast cancer came with a $3.5 billion capital increase that looked designed to keep AstraZeneca’s debt under control as much as support drug development. In corporate finance terms, swapping Astra’s highly rated stock for shares in a cash-generating company like Gilead makes some sense.

What’s more, the larger a drugmaker’s sales, the more resources it can devote to R&D. The sheer scale of combining the two science teams ought to aid future drug discovery.

And yet, are these potential gains worth attempting such a massive deal in normal times, let alone in the middle of a pandemic? If AstraZeneca needs cash and wants to exploit its rising share price, it could just sell a small stake in itself to stock market investors.

Both sides have good reason to question the durability of each other’s current market values. Gilead’s new management should be wary of taking AstraZeneca’s shares as payment after their recent jump. The U.K. company trades on 21 times 2021 expected earnings, against Gilead’s 12 times. Turning good drug-testing data into revenue and profit will take time. Pascal Soriot, the AstraZeneca boss who rebuffed an approach from Pfizer Inc. in 2014, should likewise be wary that Gilead’s stock price might suffer if remdesivir disappoints.

There’s some logic to a combination. But it’s not clear that either side needs this deal half enough to divert them from the job in hand.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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