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Rumors swirl about an AstraZeneca and Gilead megadeal—but it doesn’t make sense

June 8, 2020, 9:12 PM UTC

Nothing gets biopharma investors’ blood pumping quite like the rumor of a massive corporate marriage—especially when it involves two of the world’s most prominent drugmakers.

On Sunday, Bloomberg reported that the British drug giant AstraZeneca had approached California-based biotech Gilead about a potential M&A that would amount to “the biggest health care deal on record,” per the publication.

The companies have been mum on how true those claims are. AstraZeneca and Gilead had not responded to Fortune’s requests for comment as of press time, and this post will be updated if they do. Such a deal, however, would be undeniably historic, rivaling the proposed but eventually scuttled $160 billion deal between Pfizer and Allergan in 2016.

It would also easily outpace other cash-and-stock acquisitions such as 2019’s $63 billion buyout of Botox maker Allergan by AbbVie, which manufactures the world’s bestselling drug, Humira, and the $74 billion deal between Bristol Myers Squibb and Celgene. (Of note: The proposed Pfizer-Allergan transaction was meant to shift U.S.-based Pfizer’s tax domicile to Europe and was subsequently doomed by the Treasury Department’s refusal to allow that to happen.)

An AstraZeneca-Gilead combination would create a company with more than $230 billion in market value. But the question of if it makes sense, from both a financial and life sciences innovation standpoint, is complicated.

Potential synergies

Biopharma is a curious sector on the acquisition front. Traditional Big Pharma companies—the firms which generate the most revenue across the globe, such as Pfizer, Johnson & Johnson, Roche, Merck, Novartis, AbbVie, AstraZeneca, Gilead, and others—aren’t always known for merging within their own ranks (with a few notable exceptions such as AbbVie-Allergan).

What tends to happen is that big pharma companies insource innovation from leaner biotechs that have a thirst for risky experimental science but lack the wide-scale manufacturing and sales capacity of the industry titans.

One perfect example, prior to its own acquisition by AbbVie, is Allergan. Under CEO Brent Saunders, the company struck dozens of deals and partnerships with smaller biotechs.

But a mega-merger needs to pay off dividends in some ways. So how would that work for AstraZeneca and Gilead?

For one thing, AstraZeneca is a long-standing specialist in cancer therapies and had an especially good year at the the 2020 American Society of Clinical Oncology meeting, the largest cancer conference in the world. Oncology is a field that Gilead has increasingly waded into under the leadership of Daniel O’Day, who took over the top perch a little more than a year ago. (Strikingly, O’Day and current AstraZeneca CEO Pascal Soriot were once executive colleagues at the Swiss drug giant Roche.)

And then there’s the coronavirus. The fight against COVID-19 has galvanized pretty much all of the biggest names in Big Pharma—AstraZeneca and Gilead are no exception.

Gilead gained prominence for earning the first Food and Drug Administration emergency authorization for a COVID-19 treatment earlier this year for remdesivir. From a more bird’s-eye view, virus therapies (particularly HIV treatments) make up the bulk of Gilead’s revenues, approximately 75% in 2019; AstraZeneca isn’t involved in the space. And from that standpoint, diversification may make sense—but it would be a risky one seeing as the countries most heavily afflicted by HIV are low- to middle-income ones which wouldn’t be able to pay outsize prices. Generally, the overlap between the two firms when it comes to the drugs they make is slim.

But if this is an infectious diseases business play, AstraZeneca is currently working with Oxford University on a COVID-19 vaccine and claims it can produce two billion doses of it should the experimental vaccine be approved, an effort that has been bolstered by an up to $1.2 billion commitment by the United States. What remains unknown is how lucrative a coronavirus vaccine would be from a financial standpoint since companies making such treatments would be under immense pressure to offer them at minimal costs.

Cash on hand and a question of geopolitics

SVB Leerink analyst Geoffrey Porges has a simple take on the AstraZeneca-Gilead rumor mill: It just won’t happen.

“Gilead’s fortunes are improving, investor sentiment is positive, management is new, fresh, and energized, and the company’s operating and strategic performance has been strong,” Porges said in an investor note. “Most large biopharma deals arise from a position of distress, not strength, and Gilead today is far from distressed.”

What Gilead also has is a whole lot of cash on hand that may help AstraZeneca significantly. However, Gilead CEO O’Day has only been on the job for about a year and a half and has already made marked changes to its business structure, including the refocus on oncology, which raises questions about whether or not he’d be willing to engage in such a transformative deal.

There’s a geopolitical element to this, too. AstraZeneca is a British company, and therefore an acquisition of Gilead could force the latter to relocate overseas. That could be a messy ordeal given that the U.K.’s decision to leave the European Union has created supply chain problems for drugmakers in the country, AstraZeneca included.

What would the deal mean for innovation?

Biopharma often brags that innovation is the beating heart of the industry. Mega-mergers don’t necessarily lead to that.

Emerging biopharmaceutical companies (EBPs)—the firms which spend less than $200 million on R&D each year or less than $500 million in global revenues, a.k.a smaller biotechs, as defined by analytics firm IQVIA—tend to be hubs of innovation, especially in recent years.

“Our industry’s long-term success—and literally the health of humanity—depends on sustained innovation, which, time [and] again, is shown to be harder in larger organizations than smaller ones,” Michael Gilman, a scientist and biotech CEO, wrote on Twitter, adding that “it’s clear that every company’s DNA is different—and that diversity is a further driver of innovation.”

IQVIA’s numbers support that argument. The firm found that “EBPs encompass 3,212 companies in 2018 and account for 73% of late-stage research” in drug development. Furthermore, such companies were the original patent holders for 29 of the top 100 drugs in 2018, which accounted for 40% of pharmaceutical sales in the U.S.