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Gilead Sciences: Potential Acquisition Candidates

Summary

I examined Gilead's purchase of Pharmasset as a template for finding future acquisition candidates.

Based on my calculations, Gilead's next acquisition candidate have a market cap of between $5.82 and $33.45 billion.

The three companies that met my criteria were Vertex Pharmaceuticals Incorporated, Baxalta and Incyte.

In this article, I will search for potential acquisition targets for Gilead Sciences (NASDAQ:GILD). After the most recent quarter where Gilead beat its expectations by a wide margin, the stock sold off because many investors are waiting for Gilead to make an acquisition to add to future growth. The reason behind those views is eventually as more people are treated and cured there will be slowing growth in the HCV market in the United States and Europe and other markets like Japan where GILD just received approval this summer. For my screening process, I looked at information available from when Gilead acquired Pharmasset back in 2011 as a template to search for current candidates.

  • Pharmasset was purchased for $11 billion
  • 89% premium to closing price prior to acquisition announcement
  • 59% above all-time closing high

Step #1: What size of acquisition could Gilead make?

-Minimum Size: Looking at the Pharmasset deal where Gilead paid $11 billion, I believe any needle-moving deal it would pursue now, would at a minimum cost Gilead the same price as its Pharmasset deal. Therefore, the minimum market cap that any company I believe Gilead would acquire for the same 89% premium as it acquired Pharmasset for would be $11 billion/ 1.89= $5.82 billion.

-Maximum Size: To estimate the maximum size of deal that Gilead could afford it is first important to point out that I believe Gilead would not do such a massive deal where it would have to issue stock as this would defeat the purpose of its ongoing share repurchases. Therefore, I looked at the available financial resources that Gilead had when it purchased Pharmasset for cash to determine what percentage of available funds it used for that acquisition. To calculate funds available for an acquisition, I used projected free cash flows plus any cash on the balance sheet. The first table below shows the y/y FCF growth rate leading up to when Pharmasset was purchased. The second table...


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