This week got off to a rousing start for the biopharmaceutical world with Pfizer 's (NYSE: PFE) announcement that it's acquiring Array BioPharma (NASDAQ: ARRY) for $11.4 billion . Anytime there's a sizable deal like this, it raises one question in the minds of investors: Who's next?
Addressing which big drugmakers might follow in Pfizer's footsteps by making an acquisition is easier than identifying the smaller companies that are the top buyout targets. Amgen (NASDAQ: AMGN) , Biogen (NASDAQ: BIIB) , and Gilead Sciences (NASDAQ: GILD) are three big drugmakers that I think are most likely to make acquisitions in the not-too-distant future. Here's why.
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Amgen's top blockbusters are losing steam . Immunology drug Enbrel competes in a crowded market with competition intensifying as new, more powerful drugs are launched. The next four drugs that currently make the most money for Amgen -- Neulasta, Epogen, Aranesp, and Sensipar -- either already face biosimilar or generic rivals or will do so soon. These five drugs generated more than 60% of Amgen's total revenue last year.
The big biotech's lineup includes several rising stars, especially osteoporosis drugs Prolia and Xgeva, leukemia drug Blincyto, and new migraine drug Aimovig. However, these drugs won't be enough by themselves to enable Amgen to deliver strong growth with declining sales for its top five. And while Amgen has a promising pipeline, most of the candidates that could really make a difference are in early stage clinical studies.
Amgen CEO Bob Bradway said in the company's Q4 earnings conference call in January that Amgen would "look across the waterfront of smaller and larger deals." But there haven't been any M&A developments from the company so far.
In the meantime, Amgen's cash stockpile continues to grow. The company reported cash, cash equivalents, and marketable securities totaling $26.3 billion as of March 31, 2019. With this large cash position and continued strong cash flow, Amgen shouldn't have any problems making deals in the near future.
Biogen has already made one acquisition this year. The company closed on its $800 million buyout of Nightstar Therapeutics in early June. While the pickup of the small gene therapy biotech bolsters Biogen's pipeline, there are plenty of reasons why its shopping spree could continue.
Sales are slipping for Biogen's multiple sclerosis (MS) franchise. The biotech's five MS drugs generate around 57% of total revenue. Royalties from Roche 's (NASDAQOTH: RHHBY) sales of MS drug Ocrevus help somewhat, but Ocrevus also hurts some of Biogen's other MS drugs.
Biogen's total revenue continues to increase, with year-over-year revenue up 11% in the first quarter . That growth is being driven primarily by spinal muscular atrophy (SMA) drug Spinraza. The bad news for Biogen is that Spinraza now has competition with the recent FDA approval of Novartis ' (NYSE: NVS) SMA gene therapy Zolgensma .
Shareholders had hoped that Biogen's Alzheimer's disease drug aducanumab would live up to its hype as a potential game changer. However, the drug flopped in late-stage clinical studies .
Biogen still has money to spend on acquisitions, though. I t report ed $5.3 billion in cash, cash equivalents, and marketable securities as of the end of March, although the total didn't reflect the cash spent on the Nightstar deal.
3. Gilead Sciences
Gilead Sciences faces its own set of challenges. The big biotech's hepatitis C virus (HCV) franchise has been like a giant vacuum cleaner sucking away any chance of revenue or earnings growth over the past few years. Even though Gilead finally returned to growth in the first quarter , it might be short-lived. The company's HCV sales received a temporary boost in Q1 from some timing factors.
HIV drug Biktarvy has been and almost certainly will continue to be a huge success for Gilead. However, some of Biktarvy's gains will come at the expense of the company's older HIV drugs. Gilead's cell therapy Yescarta continues to pick up momentum, but it could still take a while for the drug to become a blockbuster.
Perhaps the most challenging area for Gilead now is with its pipeline. The biotech experienced two clinical failures this year for lead nonalcoholic steatohepatitis (NASH) candidate selonsertib. Gilead's anti-inflammatory drug filgotinib has a lot of promise, but the FDA is requiring the company to conduct a safety study that will delay a U.S. regulatory filing.
New CEO Daniel O'Day has stated that his top priority is to beef up Gilead's pipeline. He's most likely to lead the company in making relatively smaller bolt-on acquisitions of small biotechs focused on oncology or NASH. O'Day has ample financial flexibility for making deals: Gilead had $30.1 billion in cash, cash equivalents, and marketable securities at the end of March.
Don't count the chickens before they hatch
While Amgen, Biogen, and Gilead certainly seem likely to make acquisitions in the near future, don't buy these drug stocks solely on hopes that deals will boost their fortunes. It could take longer than expected for any acquisitions to be made. There's also the possibility that the companies could make bad deals that don't pay off.
Of these three big biotech stocks, I think Gilead is the most likely to succeed regardless of what acquisitions it makes. Gilead's HCV sales are stabilizing. It continues to dominate in HIV. Filgotinib should be a big winner over the long run.
It would certainly help if Gilead could scoop up a small biotech with a great NASH candidate or a promising immunotherapy. I fully expect that will happen. Even if not, though, I think Gilead is headed for a comeback.
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Keith Speights owns shares of Gilead Sciences and Pfizer. The Motley Fool owns shares of and recommends Biogen and Gilead Sciences. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy .
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