Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
When Gilead Sciences (Nasdaq: GILD ) purchased Arresto Biosciences late last year, I wondered whether the HIV specialist was inching into the cancer market. Today, with the purchase of privately-held Calistoga Pharmaceuticals, the company dove straight in.
Let's just hope it doesn't crack its head open on the bottom of the diversification pool.
Calistoga offers Gilead one compound, CAL-101, that's in phase-2 trials for a couple of different cancers and a pipeline of preclinical compounds that might be worth something down the line. Gilead is paying $375 million upfront, and it's on the hook for up to an additional $225 million if milestones are met. The deal seems reasonable on the surface, and Gilead can certainly afford it; at the end of last year, the company had $5.3 billion in the coffers.
But just because it's a decent deal doesn't mean Gilead should be jumping into the cancer realm. Does it really want to be competing with Celgene (Nasdaq: CELG ) , Amgen (Nasdaq: AMGN ) , Onyx Pharmaceuticals (Nasdaq: ONXX ) , and the other companies with more experience in that arena?
Gilead tried this once before. A decade ago, it licensed a bunch of cancer drugs but eventually sold the entire division to OSI Pharmaceuticals.
Admittedly, the company needs to diversify if it wants to grow; its top three drugs made up nearly 80% of revenue last year. Once the patents expire, sales will come crashing down, and the up-and-coming HIV drugs in its pipeline will have a difficult time competing against cheap generics. But I'm not initially convinced that cancer drugs are the way to go.
Admittedly, I don't have any better suggestions for Gilead to diversify into; branching out into heart drugs hasn't exactly been the best move.
Maybe Gilead would be best off sticking with other infectious diseases -- the company has a fairly strong hepatitis C pipeline -- and returning the free cash to shareholders in the form of a dividend. Sure, it's not as sexy and the cash flow will dry up when the HIV drugs start declining, but it might be more beneficial to shareholders in the long run.
Interested in keeping track of Gilead as it diversifies into oncology? Click here to add it to My Watchlist, which will help you keep track of all our Foolish analysis on Gilead.