Gilead's $21 Billion Deal Splurge May End in Regret

(Bloomberg Opinion) -- Gilead Pharmaceuticals Inc. has faced the same problem for years: The drugmaker has a strong core business in its world-leading HIV franchise, but it hasn’t been able to consistently grow beyond that base the way it should. Against that backdrop, you'd think a more aggressive M&A strategy would be cause for celebration. The devil, as always, is in the details.

Gilead's $21 billion purchase of New Jersey-based biotechnology firm Immunomedics Inc. and its promising breast cancer drug Trodelvy, announced Sunday afternoon, certainly qualifies as a bold move. At $88 a share, the acquisition represents a more than 100% premium on the smaller company's stock price before the news broke. And CEO Dan O'Day has the right idea — the acquisition will aid Gilead's sales growth and help with its diversification into cancer drugs.

Gilead does need to stock its drug cabinet. A previous expensive foray into cancer medicines, the $12 billion purchase of Kite Pharma Inc. in 2017, was written down twice after disappointing sales. The former jewel of its late-stage pipeline, the arthritis drug filgotinib, was rejected by the Food and Drug Administration in August, significantly delaying a crucial approval. And Gilead's high-profile Covid-19 treatment remdesivir should provide $2 billion to $4 billion in extra revenue this year, but sales will quickly drop off if other therapeutics or vaccines arrive.

Is Immunomedics’ Trodelvy the answer, though? It will be a fine addition as far as it goes. Analysts expect the medicine, approved by the FDA in April to treat a difficult subset of breast cancers, to pass $750 million in sales in 2023. However, the purchase’s high price tag means the drug will have to surpass that level for years to justify the cost. While triple-digit deal premiums do happen in biotech M&A, they're uncommon for larger deals like this one, and Gilead’s comes after a 99% run-up in its target's shares.

There's no sure path to sustained blockbuster sales for Trodelvy. Making things worse, AstraZeneca Plc is partnering with Daiichi Sankyo Co. on a potential direct competitor. Sales could potentially increase if the drug succeeds in other cancer types, but far more medicines aspire to that sort of expanded use than achieve it. It may take a series of best-case outcomes and a long time for Gilead to recoup its money, let alone see a return. While Gilead can afford the deal with $21 billion in cash on hand and robust cash flow, its targets will be far smaller going forward.

The deal also suggests strategic confusion. O'Day's first big transaction after taking over in 2019 was a $5.1 billion partnership with Galapagos NV. He chose to buy an equity stake in the company and take part ownership of R&D projects instead of purchasing the whole business outright because he believed Galapagos would be more innovative on its own. It's a reasonable strategy and limits Gilead's downside, though the firm paid a lot for what it got. But then in March, O'Day edged away from caution by announcing a high-premium acquisition of cancer-drug developer FortySeven Inc. for $4.9 billion; and now, he is seemingly throwing all caution to the wind with his deal for Immunomedics.

So, should investors celebrate this deal? Immuomedics shareholders certainly should. But with Gilead once again indulging in its propensity to overpay, you can forgive its investors if they’re not jumping for joy. The payoff will be that much harder to achieve, and the chance of regret that much more likely.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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