Long humbled by the lack of performance in all but a handful of big biotechs, health care investors are starved for mergers. Like weary Olivers, they want more.
So it's no surprise that when
proposed this morning the roughly half-a-billion-dollar purchase of antifungal, anticancer and combinatorial-chemistry company
, investors liked the deal. Never mind that the acquisition doesn't appear, at first blush, to reap too many "synergies," in the hackneyed language of investment bankers. For one, Gilead is an antiviral company and doesn't have active discovery programs in any of NeXstar's areas.
The support for the deal was solid but unemotional -- an oddity for a sector that stirs passions more than generates profits. "I'm in favor of mergers in general in the biotech industry, because there's so much overcapacity," says one analyst at a major New York hedge fund that holds Gilead shares.
In NeXstar, Gilead and its well-respected CEO John Martin get a sales force, primarily based in Europe, which will sell its as-yet unapproved AIDS drug
and its hepatitis-B drug, which is the same drug as the AIDS product but will have a different name. Building a sales force and a presence in Europe might have cost $50 million to $60 million a year for the first several years; now Gilead saves the cash, paying with nicely valued stock instead.
One hedge fund manager thinks the deal reflected Gilead management's feeling that it wanted to take advantage of its rich stock. There were quiet worries that the company did the deal because Preveon could turn out to be too toxic, but they were largely discounted by the bulls.
"Overall, it's an example of a biotech merger that people want and like: It expands the technology and pipeline, it's accretive, it's got late-stage and early-stage products," says Rich van den Broek, an analyst at
Hambrecht & Quist
, which rates the company a strong buy and has done banking for Gilead.
The acquisition is the latest in a slow but steady trickle in biotech, which up until around six months ago was truculent at best about making combinations. The deal initially was valued at around $550 million, or $17.48 a share, which is just under five times NeXstar's sales. That valuation dipped as Gilead shares slipped to 40 3/4, down 1/2. NeXstar closed at 15 1/8, up 1 5/16, a 9.5% gain and 52-week closing high. That reflects arbitragers' shorting of Gilead and buying of NeXstar and not investor sentiment, several investors and analysts say.
By the recent standards of
agreement to buy
decision to acquire
, Gilead isn't paying an extreme amount for NeXstar. Those deals were at around six and 10 times sales, respectively. NeXstar had product sales of $108 million last year, up 21% from the year earlier.
'I think they'll gut the R&D line like a fish,' says H&Q's Rich van den Broek.
The problem from NeXstar investors' point of view was that it spent too much money and wasn't making any. The company lost $6.7 million in last year's first nine months, which is why this rarity among biotechs, a company with actual revenue, was only accorded a pre-acquisition market cap of $460 million, fully diluted. (The stock had run up in the last week.)
Gilead figures to change all that: "I think they'll gut the R&D line like a fish," says van den Broek. Says the hedge fund analyst: "The only way it will work is if Gilead is fairly ruthless about restructuring NeXstar."
Unfortunately for Gilead, since the deal is being done with pooling accounting, NeXstar's plan to spin off the obvious albatross
, a drug discovery technology division, cannot happen. But Gilead isn't exactly going to make funding it a priority.
Van den Broek says that NeXstar, which he doesn't cover, was on track for around 30% growth this year and was expected to break even. NeXstar had widely been viewed as on the block for a while.
According to Gilead CFO Mark Perry, NeXstar has around 135 employees in Europe, of which 100 to 110 are sales people, which shows in sales. NeXstar's antifungal agent
, sold by Japanese company
in the U.S. with a small contribution from NeXstar, has been a bust here, where it has only about a fifth of the market. But in Europe, it has about 80% of the market. Gilead could look to restructure the Fujisawa deal to gain more rights to the drug here, says Perry.
Perry says the deal will mitigate Gilead's 1999 loss, though the biotech will lose a chunk of change this year. It could start making money in next year's later quarters, depending on the speed of the Preveon approvals. The company plans to file for Preveon approval in the U.S. in the second quarter, with approval potentially coming this year.
Gilead also has a flu drug, code-named
, that is licensed to Swiss drug company
. Roche is expected to file for approval for the flu drug in April. But after
was rejected by a
Food and Drug Administration
panel last week, the future of that product, and how big the potential market is, remains deeply
The acquisition puts a new wrinkle on the expectation that Gilead could sign a major global partnership with a Big Pharma company to market its hepatitis-B product. CFO Perry says a deal was expected by midyear but now says it could take many shapes, including a partnership focused solely on Asia, where the big -- but severely untapped -- hepatitis-B market lies.
The new company will have big news in late March. Gilead scientists will make public on March 21 data on Preveon at half the previous dose. The bulls hope it will show the same effectiveness as the higher dose, but with fewer side effects.
Data on NeXstar's antifungal drug
will be made public this month as well. As a further bonus, management of both companies were only too happy to share that a study comparing AmBisome to competitive agent
will come out that month.