Gilead-Vertex Deal Has 'Low Probability' Of Happening, RBC Capital Says

In a report published Tuesday, RBC Capital Markets analyst Michael Yee commented on the increasing Street "appreciation" over the idea that

should acquire

. Yee noted that many investors are working under the assumption that shares of Gilead are cheap (trading at an industry-low 10x PE while its peers and big pharmaceutical names are trading at 15-20x) and "activism" could help create value by calling for more deals or a more aggressive buyback given the company's "significant" cash flow valuation. However, acquiring Vertex would give Gilead control of a $220,000-300,000 drug for an orphan indication for kids and the "absolute high price" may cause some questions as Gilead has already been placed in the spotlight over its $85,000 Hep C drug. Moreover, a deal with a price tag of $40 billion to $50 billion is something that is "doable" for Gilead, the analyst suggested that the company could (and may want to) buy "a lot of other things," like 10 companies at $1 billion to $5 billion each to create more value. Yee continued that Gilead's management has stated they derive the greatest value by acquiring Phase II assets and helping smaller companies through Phase III and manufacturing. In addition, management has also noted that it generally is seeking oncology assets, leading the analyst to argue that the company will continue to seek out Phase II and Immuno-oncology assets to build a five-year plan, rather than jump in to an acquisition to drive earnings per share accretion. Bottom line, Gilead acquiring Vertex makes "great sense on paper" but there is a "pretty low probability" of such a transaction occurring.