Here's why Gilead should buy a key asset from Celgene, as long as it can strike a deal for less than $9.6 billion

  • Bristol-Meyers Squibbstruck a $74 billion deal in January to acquire the drug company Celgene.
  • To get regulators to sign off on the deal,Celgene plans to divest an anti-inflammatory drug called Otezla.
  • Wall Street analysts are trying to figure out which pharma companies are likely to acquire Otezla. They’ve named Gilead, Amgen, and Johnson & Johnson.
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Bristol-Myers Squibbstruck a $74 billion deal at the start of the year to acquire the drug company Celgene. To help get the deal approved, Celgene plans todivest an anti-inflammatory drug called Otezla.

Wall Street analysts have made a list of companies likely to acquire Otezla, with the most notable beingGilead, Amgen, and Johnson & Johnson.

RBC Capital Markets analyst Brian Abrahams said in a research note dated Thursday that buying Otezla would be beneficial for Gilead, as long as the company doesn’t overpay for the drug. Abrahams estimates Otezla to be worth roughly $8 billion, and said Gilead has the cash available to make the purchase. Abrahams said Gilead shouldn’t pay more than $9.6 billion for the drug, based on his analysis of the treatment’s potential to generate profits.

The RBC note emphasizes that while Gilead just spent $5.1 billion on apartnership with the Belgian biotech company Galapagos, the company finished the first quarter of 2019 with $30 billion in cash, allowing for additional purchases to be feasible.

Read more:Inside Gilead’s unusual $5.1 billion partnership with a Belgian biotech, which was codenamed ‘Project Eagles’ and was sealed the night of a glitzy anniversary party

Abrahams said Otezla would fit well with Gilead’s other efforts in treating inflammation. Otezla treats a skin condition called plaque psoriasis by fighting inflammation inside cells. Gilead and Galapagos are working on another anti-inflammatory drug called filgotinib and would need to build out operations to promote the drug. Because of this, Abrahams’ believes 65% of the selling, general and administrative costs related to Otezla would have to be paid by Gilead regardless.

On the other hand, Mizuho Securities analyst Salim Syed said that Otezla isn’t a good fit for Gilead, because it wouldn’t fit with the company’s merger-and-acquisition philosophy. He estimates the value of Otezla at about $5 billion to $10 billion.

He said in a July 17 research note that the most likely buyer is Amgen, with the second most likely being J&J. Syed noted that Amgen’s top drug Enbrel, which also treats conditions like arthritis and plaque psoriasis, is undergoing litigation. He said acquiring Otezla could help the company build out its pipeline.

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J&J already has several drugs for similar conditions, meaning that adding Otezla could help the company expand its offerings. Because the drug is taken by mouth instead of injected, it could help diversify J&J portfolio, Syed said.

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