AstraZeneca and Gilead Sciences merger hard to square say analysts

AstraZeneca PLC (LON:AZN) shares fell as investors digested news that it had approached US rival Gilead Sciences Inc (NASDAQ:GILD) about a possible merger. Neither side officially denied (or confirmed) the Bloomberg story but reports today indicated talks are not ongoing and that both had decided to focus on their own developments. UBS said, at first sight, it would seem a strange move by Astra as there is hardly any therapeutic and strategic overlap between the companies. The Swiss broker added, however, that it might be Gilead’s cash pile that appeals to the Anglo-Swedish giant. The US firm had US$24bn of cash at the end of the first quarter and the broker believes Astra has poor cash conversion. “Gilead needs a pipeline (which AZN has) and AZN could be looking for cash, not least to cover its dividend,” said the broker. “So, whilst there may not be obvious strategic sense (outside cell therapies), we believe dismissing this too quickly may be rash.” Another issue for UBS is that although there will be an initial earnings boosts from synergies, growth would be diluted further out “For a stock that is meant to be a growth stock, that would probably be a bitter pill to swallow for growth investors.” Peter Welford at Jefferies also suggests that Astra’s debt pile might be a reason for it to consider a deal that otherwise seems to have little strategic rationale. “AstraZeneca has impressive near-term growth (2021-24E CAGR Revenue +11% for Core EPS +20%), a relatively strong pipeline perhaps only behind Roche, and an operating leverage thesis largely driven by top-line growth. “Hence, we question the benefit of a merger at this time. “If anything, we believe pursuing such a deal could perhaps alert investors that management/board is aware of potential underappreciated pipeline, growth, or cash flow risks.” Similarly, for Gilead, boss Daniel O’Day has only been in the job 15 months and is still in the midst of leading a turnaround, said the broker. The company’s HIV franchise is arguably underappreciated and bolt-on deals seem more likely, added Jefferies. Russ Mould, investment director at AJ Bell, added that investors are unlikely to welcome a large M&A deal at a time when both companies are trying to fight coronavirus as it could prove to be a distraction to management. Gilead’s remdesivir is seen as the one of the most promising of the anti-virals currently under trial as a treatment for COVID-19, while Astra is collaborating with Oxford University over the mass production of a vaccine. “The timing seems wrong when both companies have such important work to do,” said Mould. AstraZeneca shares eased 2.5% to 8,217p.