Allergan is Not Going to Buy Gilead

It's on a deal spree, but this would be a deal too far.

What's better than buying two companies in one week? Buying two in less than one day.

Allergan's two rapid-fire deals on Tuesday, for firms with drug candidates for the liver disease NASH, are part of a buying binge that is single-handedly boosting the biotech industry. They also inspired Gabelli analyst Kevin Kedra to suggest Allergan might next target biotech giant Gilead, the industry leader in liver disease. 

It would be the mother of all blockbusters, but it's just not going to happen. 

Too Big a Mouthful

Though Gilead is well off its peak valuation, acquiring it would be a stretch for Allergan.

Source: Bloomberg

Gilead's market cap, at $107 billion, is about $70 billion lower than its peak last year. It's been driven down by a broad biotech selloff and questions about future sales of Gilead's blockbuster hepatitis C drugs. But that market cap, plus a substantial premium, is still an unrealistic stretch for Allergan, currently worth $95 billion. 

Even after selling its generics business to Teva for $40.5 billion, Allergan still had a heavy debt load of $33.2 billion as of its second-quarter earnings call.

It still had $27.56 billion in cash as of the call. But it has also announced four deals that will cost it more than $1 billion this month alone, and it's almost done with a $5 billion buyback that commenced after the Teva sale closed. So the current cash balance is likely closer to $20 billion than $30 billion.

Paying it Down

Allergan's debt load has improved after a cash infusion from Teva, but the company has been aggressive about putting that money to work elsewhere

Source: Bloomberg

8/04 figures from Allergan's 2nd quarter earnings sllide deck *since this figure was released, Allergan has completed multiple acquisitions and most of a $5 billion buyback program

Kedra's note suggested Allergan could buy Gilead for $153 billion, with a $40 billion stock component. Kedra estimated that would leave $113 billion or so in debt financing and $120 billion in net debt for the combined entity.

That is a staggering amount of debt to raise and carry. It would be the industry's single biggest net debt load by $90 billion dollars, and bigger than that of any non-financial-services company as of the second quarter. 

Loaded Up

A combined Allergan and Gilead could have a bigger net debt load than any non-financial company, according to Bloomberg data

Source: Bloomberg/Gabelli

*based on assumptions in Gabelli research note

Kedra's note supposes Allergan's Irish tax domicile might resolve Gilead's tax issues. Gilead has been forced to raise debt to buy back shares and pay its dividend because so much of its cash pile is stuck overseas. It priced a $5 billion debt offering last week. 

But staying in bounds of the Treasury's new tax-inversion rules is no mean feat. And the government has shown itself more than willing to throw new and exotic wrenches into the works of big deals. Given the still-recent trauma of Allergan's failed Pfizer deal, it's hard to imagine the company is in a hurry to jump back into the inversion morass.

Kedra's suggestion of this deal was motivated by Allergan's aggressive foray into NASH. If it's serious about liver disease, then buying the industry leader makes some sense. But everything Allergan is doing suggests it's positioning itself as a competitor to Gilead's NASH drugs, not a parent.

It did two NASH deals in a day, one at an historically high premium and another for a type of drug Gilead already owns. That seems like an odd precursor to paying vastly more for Gilead's partially overlapping set of four drug candidates. 

Allergan has claimed no interest in a transformative acquisition, preferring smaller "stepping stone" deals. So far it has stuck to that formula, and there's no sign it plans to do the opposite.

Gilead is arguably undervalued, trading at about 7 times forward earnings, compared to an average of 11.8 for its big biotech peers. But relative cheapness doesn't change the fact the company will cost in the range of $150 billion.

Cheapness is Relative

Gilead may be cheap compared to its peers, but it would still be tough to afford for just about any acquirer

Source: Bloomberg

As much fun as this deal would be, pump the speculative brakes. 

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

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    Max Nisen in New York at

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