What a Combined Gilead and Incyte Would Look Like

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Gilead Sciences Inc. (NASDAQ: GILD) has long been in need of a catalyst to move its business, and a lot of investors and analysts alike have considered this company dead money until something happens. Analysts are saying that Gilead needs to make some acquisitions to jump-start the business and reinvigorate its pipeline. But the question is finding an ideal candidate.

Even though Gilead has been on a slide, the company is still one of the three largest biotech firms in the game, with a market cap of nearly $90 billion, really opening doors on what it could acquire.

Bloomberg and StreetInsider initially proposed a merger between Gilead and Incyte Corp. (NASDAQ: INCY), citing a solid strategic fit. Merrill Lynch took this idea and ran with it, showing how these two companies could fit together.

Merrill Lynch reiterated a Neutral rating for Gilead with a $76 price target. The firm believes that given the faster-than-expected decline of Gilead’s hepatitis C vaccine (HCV) business and a lack of new revenue stream, Merrill Lynch sees the strategic rationale to acquire an oncology pipeline that has the potential to reinvigorate growth for Gilead. The Neutral rating is based on the declining HCV franchise but partially offset by the growing HIV business.

Incyte offers an ideal opportunity with its fast-growing oncology franchise and solid pipeline. Merrill Lynch commented:

Gilead has repeatedly indicated its interest in oncology. We believe Incyte could be a potential strategic fit. Incyte is a fast-growing biotech company focused in oncology/immune diseases with flagship product Jakafi and baricitinib, with FDA approval expected in April. Besides, the most important asset is IDO inhibitor, epacadostat. Currently, epacadostat is in Phase 3 development for melanoma and Phase 3 trials in 4 other solid tumor indications are slated to start in 2017 in collaboration with Merck.

Ultimately, this potential deal could offset revenue decline at Gilead. The brokerage firm went on to comment:

If reports are correct, a potential deal with INCY could lift GILD from an 11% revenue decline to 5% decline in CAGR over the next five years although we believe any potential transaction would come at a premium. By assuming a hypothetical 30% premium based on historical transactions in the industry on Incyte’s closing price of $149.24/share on 3/10/17, a possible deal with these assumptions could mark a hefty price tag of $42 billion. In our view, Gilead could potentially finance such an acquisition with all cash by borrowing up to 4x the 2017 pro forma Gilead/Incyte EBITDA of $16 billion but would likely need to repatriate its ex-US cash in 2018 and de-lever. Gilead holds $32.4 billion in cash ($27.4 billion ex-US and $5 billion in the US) and $26.3 billion in debt as of 12/31/16. We estimate that a potential Incyte acquisition as we outlined could be roughly 7% dilutive to Gilead 2018 earnings and become accretive in 2019 based on: 1) our estimates for $8.6 billion and $7.5 billion in Gilead net income in 2018 and 2019, respectively; 2) Gilead will repatriate its $27.4 billion ex-US cash in 2018 to repay acquisition debt; and 3) roughly $300 million annual tax savings from Incyte’s net operating loss credit.

Shares of Gilead were last seen at $67.80 on Monday, with a consensus analyst price target of $79.15 and a 52-week trading range of $65.38 to $103.10.

Incyte was trading at $145.85. The stock has a consensus analyst price target of $139.75 and a 52-week trading range of $60.30 to $150.42.