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3 Great Acquisition Targets for Gilead Sciences -- and 1 Iffy Candidate

Keith Speights, The Motley Fool

Gilead Sciences' (NASDAQ: GILD) acquisition of Kite Pharma, which closed in October, was a move generally well received among investors. The deal instantly catapulted Gilead to a leadership position in the red-hot area of cell therapy. However, even the additional buyout of Cell Design Labs announced in December wasn't enough to satisfy investors anxious to see Gilead return to growth. 

There's no question that Gilead can afford to make more deals. The big biotech reported $36.7 billion in cash, cash equivalents, and marketable securities at the end of 2017. Gilead also has ample motivation to be on the hunt for more buyout candidates. But which smaller companies could Gilead buy? Here are three biotechs that I think would be great acquisition targets for Gilead -- and one that could be but appears iffy.

Drawing of big fish about to eat smaller fish

Image source: Getty Images.

Filling the gene-editing void

During Gilead's fourth-quarter earnings call a few days ago, CEO John Milligan mentioned gene editing as an area of interest for the company. Later in the call, Gilead Chief Scientific Officer Norbert Bischofberger discussed the biotech's cell therapy program for solid tumors and noted that that "one thing missing is gene editing."

If Gilead has a gene-editing void that it wants to fill, there are several small biotechs that could be on its radar. I think the top candidates are CRISPR Therapeutics (NASDAQ: CRSP) and Editas Medicine (NASDAQ: EDIT).

Both CRISPR and Editas are using CRISPR-Cas9 gene editing in pre-clinical cell therapy research programs. Of course, so is Intellia Therapeutics, but the biotech has already partnered with Novartis. Sangamo Therapeutics uses a different gene-editing approach for its cell therapy efforts, but I view the biotech as a potential buyout target for Pfizer because of the two companies' close partnership in developing hemophilia drugs.

Which is the better fit for Gilead -- CRISPR or Editas? There are a couple of advantages for CRISPR. One is that while the biotech is collaborating with Vertex on three programs, it doesn't have a big partner for its cell therapy program. Another is that CRISPR Therapeutics appears to be on track to file an Investigational New Drug application in the fourth quarter of 2018 to advance one of its cell therapy programs into clinical testing.

Editas, on the other hand, has a partnership with Juno Therapeutics with its cell therapy program. With Celgene in the process of acquiring Juno, Gilead could find itself in a bidding war with Celgene if it chose to go after Editas. However, Editas claims intellectual-property rights for use of CRISPR/Cas-9 in humans, so paying a premium now for the small biotech could be worth it over the long run.

Another liver drug in the quiver

Gilead has already shown in the past that it's willing to make acquisitions to bolster its position in the race to develop drugs to treat non-alcoholic steatohepatitis (NASH). The liver disease has been called "the next hepatitis C," because of the increasing number of new diagnoses and for the huge market that could await.

Probably the most attractive acquisition target for NASH right now is Madrigal Pharmaceuticals (NASDAQ: MDGL). I recently stated that Madrigal is one of three small biotechs that big drugmakers are probably drooling over. That wasn't an exaggeration.

Scientist holding test tube with healthcare icons in foreground

Image source: Getty Images.

Madrigal stock has soared over the past six months, thanks to tremendous results from a phase 2 study of lead candidate MGL-3196. Patients receiving a higher dose of MGL-3196 achieved a 42% reduction in reducing liver fat, compared with only a 9.6% reduction for patients on placebo.

Gilead currently has three NASH candidates in its pipeline: ASK-1 inhibitor selonsertib, FXR agonist GS-9674, and ACC inhibitor GS-0976. The addition of MGL-3196, a thyroid hormone receptor beta-selective agonist, would give the big biotech another approach to treating NASH. Buying Madrigal could lock up another potentially effective drug that Gilead could use as a monotherapy or in combinations with its other drugs.

An iffy prospect

What about Galapagos (NASDAQ: GLPG)? Gilead and the small biotech already have a partnership on filgotinib. The autoimmune-disease drug could be a blockbuster within the next few years. Gilead already owns 13% of Galapagos, so why not buy the biotech outright?

Perhaps the biggest reason is that Galapagos apparently doesn't want to be acquired. Galapagos CEO Van de Stolpe is reportedly trying to secure a European pharmaceutical company to acquire at least a 10% stake in Galapagos to thwart a takeover bid from Gilead. 

On the other hand, Galapagos exercised its option to co-promote filgotinib and split profits in several European markets. If Gilead bought Galapagos, it would be able to keep all the money the drug is expected to make. Peak global sales for filgotinib are anticipated to be at least $2 billion.

In addition, an acquisition of Galapagos would give Gilead promising cystic fibrosis (CF) candidates that could open up a new therapeutic category for the big biotech. Vertex currently has a monopoly in the CF market, but triple-drug combinations that Galapagos and partner AbbVie are developing could take some market share away from Vertex down the road. Galapagos' CF drugs could also mesh nicely with an acquisition of CRISPR Therapeutics or Editas, both of which are developed gene-editing therapies for the disease.

What will Gilead do?

There's no guarantee that Gilead will buy any of these smaller biotechs. The company could prefer to forge a partnership with a gene-editing company, for example, rather than make an acquisition. Gilead's Bischofberger stated that the big biotech is "talking to companies" and "will do more collaborative deals" in the area of gene editing.

Gilead didn't pull the trigger on buying Kite until just before regulatory approval of Yescarta. It could prefer to take a similar approach in the NASH arena and hold off on a potential buyout. And Galapagos' reported resistance to an acquisition could cause Gilead to take a pass on purchasing its partner.

I won't be surprised, though, if Gilead buys at least one of these companies in 2018. It has the money and the motivation. 

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Keith Speights owns shares of AbbVie, Celgene, Editas Medicine, Gilead Sciences, and Pfizer. The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. The Motley Fool recommends Editas Medicine and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.