Post by tomsylver on Jun 18, 2017 19:22:38 GMT
Should Gilead Buy Tesaro?
Jun. 13, 2017 1:00 PM ET|23 comments| About: Gilead Sciences, Inc. (GILD), TSRO, Includes: CLVS, SNY
Jonathan Weber
Value, dividend investing, Growth, growth at reasonable price
(4,318 followers)
Summary
Gilead is, according to some rumors, interested in Tesaro.
Tesaro's Zejula should be successful in the future, but apart from that Tesaro's assets are likely not very valuable.
This would be a risky bet with an unknown payoff, Gilead might be better off using the cash for other purposes.
Thesis
Gilead (NASDAQ:GILD) is rumored to be interested in acquiring Tesaro (NASDAQ:TSRO), but reasons for such an acquisition are limited. Gilead is better off using the cash for other purposes.
Gilead's piggy bank is full of cash, and many analysts as well as investors want to see the company deploy some (or all) of its cash on acquisitions.
GILD Cash and Short Term Investments (Quarterly) Chart
GILD Cash and Short Term Investments (Quarterly) data by
With a combined $34 billion of cash and equivalents the company has more than enough money to buy Tesaro, rumors about such an acquisition resurfaced this week (Sanofi (NYSE:SNY) apparently is interested as well).
Such an acquisition would cost about $10 billion, which implies a premium of roughly 30% over Tesaro's current market capitalization of $7.8 billion.
Let's take a look at Tesaro's assets:
TSRO Revenue (<a href=
TSRO Revenue (NYSE:TTM) data by YCharts
Looking at Tesaro's trailing results we see that revenues are negligible, whereas the company burned about half a billion over the last year. This is due to the fact that Tesaro's only major drug has been approved just a couple of months ago, in March -- revenues of ovarian cancer drug Zejula have thus not really shown up in quarterly results yet.
Zejula is, according to Tesaro, off to a strong start in the US, experiencing rapid uptake, not only for the treatment of ovarian cancer, but also for the treatment of fallopian tube and peritoneal cancers. Zejula is reimbursed by commercial, Medicare and Medicaid carriers. Tesaro expects that Zejula will be approved in Europe during the current year, which would mean a second pillar for growth for the PARP inhibitor.
With these positive news it is not surprising that Zejula's estimated peak sales are hovering in the blockbuster region, with estimates ranging from $1.5 billion to $2.0 billion in peak annual sales.
Zejula is a drug we know has a positive value for sure, the company has other drug candidates in its pipeline, in addition to combinations of Zejula (niraparib) with other drugs for several indications.
Tesaro's clinical trials of other drug candidates than niraparib are in phase I only, the company also has some pre-clinical trials going on. Whether one of these candidates ultimately gets approved and puts a meaningful amount of money towards the company's top and bottom line is not yet known, so in order to be conservative let's assume that Tesaro's Zejula's peak sales of $2 billion are the only major revenue source.
Does it make sense for Gilead to pay 5 times peak annual sales for Tesaro's shares, especially as these peak sales are years away and should thus be discounted?
GILD PS Ratio (Forward 1y) Chart
GILD PS Ratio (Forward 1y) data by YCharts
The shares of other biotech companies are trading at much lower multiples, despite the fact that their top line performance is much more foreseeable for the coming years (and their profitability is proven). This is also true for Gilead's own shares, which trade at less than four times forward sales.
Acquisitions can be accretive at high multiples if there are a lot of synergies or if the acquirer can help the acquired grow its sales more effectively, but neither is true if Gilead acquires Tesaro: Gilead has no experience in marketing oncology drugs successfully, thus it is doubtful whether Gilead could increase Zejula's peak sales meaningfully -- an oncology focused acquirer could have more success commercializing Zejula.
There is also some risk for Zejula's sale performance from Clovis Oncology's (NASDAQ:CLVS) Rubraca (another PARP inhibitor). Clovis Oncology will release data on its most recent Rubraca trial this month, if results are good Zejula's position in ovarian cancer might be threatened, and peak sales could come in lower than the current estimate -- the valuation Gilead would have to pay for Tesaro's shares would be even higher, making this an even less compelling acquisition.
When we look at other uses for $10 billion Gilead would have to shell out for Tesaro, one possibility is for the repayment of $10 billion in debt -- the company's debt level is not threatening, but with $26 billion in long term debt its debt position is not that low either. Gilead could also repurchase about 155 million shares at the current price, which would shrink the company's share count by a whopping 12% -- this alone would deliver an EPS boost of 14% (all else equal). Gilead could also keep its cash on the sideline and wait for a more attractive opportunity, such as in a field where Gilead has more experience commercializing drugs (i.e. not oncology).
Takeaway
Gilead is, according to some rumors, interested in acquiring Tesaro, but the case for such an acquisition is not really convincing. Tesaro has one drug that we know will be successful, but peak sales are a couple of years away and there is some competition in the space.
Gilead also has no experience in bringing oncology drugs to the market successfully, so upside to peak sales seems limited.
Gilead is, I believe, better off using the cash it would have to shell out for Tesaro to pay down debt, repurchase shares, or wait for a more compelling takeover target.
Author's note: If you enjoyed this article and would like to read more from me, you can hit the "Follow" button to be informed about new articles.
Disclosure: I am/we are long GILD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Jun. 13, 2017 1:00 PM ET|23 comments| About: Gilead Sciences, Inc. (GILD), TSRO, Includes: CLVS, SNY
Jonathan Weber
Value, dividend investing, Growth, growth at reasonable price
(4,318 followers)
Summary
Gilead is, according to some rumors, interested in Tesaro.
Tesaro's Zejula should be successful in the future, but apart from that Tesaro's assets are likely not very valuable.
This would be a risky bet with an unknown payoff, Gilead might be better off using the cash for other purposes.
Thesis
Gilead (NASDAQ:GILD) is rumored to be interested in acquiring Tesaro (NASDAQ:TSRO), but reasons for such an acquisition are limited. Gilead is better off using the cash for other purposes.
Gilead's piggy bank is full of cash, and many analysts as well as investors want to see the company deploy some (or all) of its cash on acquisitions.
GILD Cash and Short Term Investments (Quarterly) Chart
GILD Cash and Short Term Investments (Quarterly) data by
With a combined $34 billion of cash and equivalents the company has more than enough money to buy Tesaro, rumors about such an acquisition resurfaced this week (Sanofi (NYSE:SNY) apparently is interested as well).
Such an acquisition would cost about $10 billion, which implies a premium of roughly 30% over Tesaro's current market capitalization of $7.8 billion.
Let's take a look at Tesaro's assets:
TSRO Revenue (<a href=
TSRO Revenue (NYSE:TTM) data by YCharts
Looking at Tesaro's trailing results we see that revenues are negligible, whereas the company burned about half a billion over the last year. This is due to the fact that Tesaro's only major drug has been approved just a couple of months ago, in March -- revenues of ovarian cancer drug Zejula have thus not really shown up in quarterly results yet.
Zejula is, according to Tesaro, off to a strong start in the US, experiencing rapid uptake, not only for the treatment of ovarian cancer, but also for the treatment of fallopian tube and peritoneal cancers. Zejula is reimbursed by commercial, Medicare and Medicaid carriers. Tesaro expects that Zejula will be approved in Europe during the current year, which would mean a second pillar for growth for the PARP inhibitor.
With these positive news it is not surprising that Zejula's estimated peak sales are hovering in the blockbuster region, with estimates ranging from $1.5 billion to $2.0 billion in peak annual sales.
Zejula is a drug we know has a positive value for sure, the company has other drug candidates in its pipeline, in addition to combinations of Zejula (niraparib) with other drugs for several indications.
Tesaro's clinical trials of other drug candidates than niraparib are in phase I only, the company also has some pre-clinical trials going on. Whether one of these candidates ultimately gets approved and puts a meaningful amount of money towards the company's top and bottom line is not yet known, so in order to be conservative let's assume that Tesaro's Zejula's peak sales of $2 billion are the only major revenue source.
Does it make sense for Gilead to pay 5 times peak annual sales for Tesaro's shares, especially as these peak sales are years away and should thus be discounted?
GILD PS Ratio (Forward 1y) Chart
GILD PS Ratio (Forward 1y) data by YCharts
The shares of other biotech companies are trading at much lower multiples, despite the fact that their top line performance is much more foreseeable for the coming years (and their profitability is proven). This is also true for Gilead's own shares, which trade at less than four times forward sales.
Acquisitions can be accretive at high multiples if there are a lot of synergies or if the acquirer can help the acquired grow its sales more effectively, but neither is true if Gilead acquires Tesaro: Gilead has no experience in marketing oncology drugs successfully, thus it is doubtful whether Gilead could increase Zejula's peak sales meaningfully -- an oncology focused acquirer could have more success commercializing Zejula.
There is also some risk for Zejula's sale performance from Clovis Oncology's (NASDAQ:CLVS) Rubraca (another PARP inhibitor). Clovis Oncology will release data on its most recent Rubraca trial this month, if results are good Zejula's position in ovarian cancer might be threatened, and peak sales could come in lower than the current estimate -- the valuation Gilead would have to pay for Tesaro's shares would be even higher, making this an even less compelling acquisition.
When we look at other uses for $10 billion Gilead would have to shell out for Tesaro, one possibility is for the repayment of $10 billion in debt -- the company's debt level is not threatening, but with $26 billion in long term debt its debt position is not that low either. Gilead could also repurchase about 155 million shares at the current price, which would shrink the company's share count by a whopping 12% -- this alone would deliver an EPS boost of 14% (all else equal). Gilead could also keep its cash on the sideline and wait for a more attractive opportunity, such as in a field where Gilead has more experience commercializing drugs (i.e. not oncology).
Takeaway
Gilead is, according to some rumors, interested in acquiring Tesaro, but the case for such an acquisition is not really convincing. Tesaro has one drug that we know will be successful, but peak sales are a couple of years away and there is some competition in the space.
Gilead also has no experience in bringing oncology drugs to the market successfully, so upside to peak sales seems limited.
Gilead is, I believe, better off using the cash it would have to shell out for Tesaro to pay down debt, repurchase shares, or wait for a more compelling takeover target.
Author's note: If you enjoyed this article and would like to read more from me, you can hit the "Follow" button to be informed about new articles.
Disclosure: I am/we are long GILD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.