Large pharmaceutical companies have used M&A to bolster their innovation for a long time, and that isn’t likely to change any time soon. Most of the big names in the pharma industry are results of such mergers.

In a recent example, AstraZeneca approached rival drug-maker Gilead about a potential merger, according to a Bloomberg report. If the transaction were to take place, it would unite two of the leading players in the fight against coronavirus. Besides, it would be the biggest health care deal on record, eclipsing Bristol Myers Squibb’s $74 billion acquisition of Celgene last year.

Gilead & AstraZeneca’s Covid-19 vaccine efforts

Gilead Sciences Inc. and AstraZeneca are pharmaceutical companies based in California (USA) and England, respectively. AstraZeneca currently has a market cap of over $140 billion, and Gilead is valued at $96 billion. Both AstraZeneca and Gilead are among the top 20 pharma firms in the world in terms of 2019 revenue. Both are also working on solutions to the COVID-19 pandemic.

AstraZeneca’s antiviral drug ‘Calquence’ has reportedly been helpful in recovery of severely affected Coronavirus patients. The company is also working on finding antibodies to treat the infection. It recently secured capacity to produce 2 billion doses of a potential coronavirus vaccine being developed in partnership with researchers at Oxford University.

Gilead has been making progress in the Covid-19 spheres as well. Its antiviral drug Remdesivir is currently being studied in various trials around the world on patients with the disease. Remdesivir was also approved by Singapore to treat Covid-19.

Gilead Science’s Remdesivir shows ‘clear-cut’ effect in treating Covid-19
Gilead Science’s Remdesivir shows ‘clear-cut’ effect in treating Covid-19

Why are analysts sceptic of the deal?

Shortly after Bloomberg said that AstraZeneca had informally approached Gilead for a deal, the two companies denied interests in a potential deal. A merger of the two companies with market capitals of $96.6 billion and $138 billion, respectively, could make the transaction one of the largest pharmaceutical deals ever. However, the deal attracted widespread scepticism off analysts and investors due to several reasons:

Political Challenges

As also stated earlier in this article, Gilead is an American Company, while AstraZeneca is British. The merger, if operational, could have been politically sensitive. This is because both the drugmakers are at the forefront of efforts to come up with a vaccine for the coronavirus induced pandemic. The American and the British Governments would undoubtedly seek control over any potential vaccine or treatment. The US Government would have done anything in its efforts to prevent the Gilead’s ownership slipping out of American hands, into the British hands.

Pharmaceutical acquisition patterns

One common pattern in almost all pharmaceutical deals, according to analysts, is that large biopharma deals arise from a position of distress, not strength. In simpler terms, large pharma deals are usually completed when one party is financially distressed, and Gilead or AstraZeneca are far from being distressed. The companies have performed well in recent years and are considered more profitable than most big Pharma companies.

Gilead and AstraZeneca’s stocks are ‘far from being distressed’ (Investopedia)
Gilead and AstraZeneca’s stocks are ‘far from being distressed’ (Investopedia)

Other Potential Deals

Analysts and experts suggest that an M&A at this juncture will serve as a distraction to the original offerings and the R&D activities that are being undertaken by the companies to come up with a covid-19 vaccine. Analysts are of the view that a limited collaboration rather than an M&A would make more sense. The pharma industry is rife with collaborations such as GlaxoSmithKline’s tie up with Sanofi SA and and AstraZeneca’s current vaccine collaboration with the Oxford University.

Gilead’s high valuation

Gilead Sciences has, in the recent times, overseen massive stock appreciations on account of Coronavirus treating abilities of Remdesivir. RBC Capital Markets analyst Brian Abrahams said, that with the recent stock appreciations and improving strategy and diversification in place, Gilead would be unlikely to take anything less than $100/share. Thus, Gilead’s overvaluation offers another turn-off for the potential deal.

AstraZeneca and Gilead’s potential merger
AstraZeneca and Gilead’s potential merger

Depressed Economy

The merger, if successful, would have been approximately a $240 billion gamble – the biggest one till date. The depressed economic outlook caused by the pandemic itself makes mega-mergers a tough call, according to London Capital Group’s Jasper Lawler.

Besides, amidst the depression in the economy, a merger would cause a potential distraction, due to which the much needed Covid-19 vaccine’s R&D may suffer.

What could a merger mean to the drugmakers?

Image Credits: Times of India

AstraZeneca had, according to the Bloomberg report, approached Gilead Sciences for talks of M&A, to give out a signal that it is open to M&A’s in the future. AstraZeneca and its smaller rival have little in common when it comes to products and strategy. Still, Gilead does have something AstraZeneca does not — plenty of cash from its leading HIV drug franchise, plus a strong balance sheet.

Finance has been a relatively weaker spot for AstraZeneca. Its net debt is already roughly twice EBITDA (a measure of yearly profit). The group had to sell stakes in promising drugs and bring in partners to co-fund research and development. UBS analysts suggested that AstraZeneca could see Gilead’s cash as a way to fund dividend payments, and improve its financial standing. A merger would also unite the two companies in the fight against coronavirus. Research & Development expenses for pharmaceutical companies are huge. Nearly 20% of a pharmaceutical company’s annual revenues are spent on R&D. Besides, the period from synthesis to commercial production of a drug may extend upto 10 years. Turning good drug-testing data into revenue and profit takes time. A merger could have undoubtedly helped in the process by capacity expansion and mass production. The companies officially put an end to all rumours of a potential marriage. However, if successful, the $240 billion deal would have had the potential to be the largest pharmaceutical deal ever.