Gilead Sciences Inc. (NASDAQ:GILD) might be the most disciplined capital allocator in biotech. For years, its management has resisted calls from the peanut gallery to make a big acquisition, while it built a fortress balance sheet that boasted $36.6 billion cash and equivalents at the end of June.
Gilead cited an overpriced market for new drug candidates as an excuse for keeping its purse strings drawn tight. This is why the recently announced $11.9 billion acquisition of Kite Pharma Inc. (NASDAQ: KITE) is such a head scratcher. The cell-based cancer therapy pioneer began the year with a $2.3 billion market cap.
Gilead's management team recently held a conference call to explain the uncharacteristic splurge to investment bank analysts. Here are three things they had to say that should ease shareholders' concerns.
1. An equally important pipeline
The Kite acquisition gives Gilead a near-term opportunity with axicabtagene ciloleucel (axi-cel), which is essentially an I.V. bag full of the patient's own immune cells that have been reprogrammed to hunt for cancer cells that display the CD19 protein on their surface. The personalized cell-based therapy works incredibly well for patients with non-Hodgkin lymphomas who have relapsed after receiving available treatments; the FDA is expected to announce its decision about the treatment's approval by the end of November.
If approved, annual axi-cel sales are expected to peak at around $2.5 billion, but the therapy needs to overcome several big challenges. Gilead Sciences shareholders will be happy to know management considers Kite's pipeline beyond axi-cel's pending applications equally valuable.
Given the safety issues associated with axi-cel and other CAR-T therapies in development, Gilead's new candidates probably won't ever become first-line treatment options for larger populations of newly diagnosed patients. However, axi-cel might have a chance at displacing risky bone marrow transplants as a second-line option for several lymphomas. Results from the ongoing Zuma-7 study will shed more light on the therapy's potential to expand to this setting.
Further ahead, an experimental therapy similar to axi-cel that targets the BCMA protein to fight multiple myeloma could be ready to enter clinical trials soon. Plus, results from an exploratory study suggest T-cell receptors modified to target the MAGE A3 protein could effectively fight a variety of solid tumors, so keep your eyes peeled for more data along these lines as well.
2. Healthy reimbursement expectations
Aggressive non-Hodgkin lymphomas resistant to available therapies have thus far proven practically incurable, but axi-cel has shown an ability to drive plenty of these patients' disease into complete remission. Medically, this is just amazing, but finding the right price for a one-time therapy isn't easy.
Gilead's management team didn't let any figures slip, but the company clearly expects "healthy reimbursement" for the innovative treatment -- with good reason. Just days after Gilead announced its intent to acquire Kite Pharma, Novartis (NYSE:NVS) earned an approval for its own patient-cell-based cancer therapy, Kymriah, and revealed an eye-popping $475,000 price tag. But that comes with an important caveat.
Novartis intends to take an outcomes-based approach to reimbursement for Kymriah that might be the greatest money-back guarantee in history. The pharma giant intends to accept payment for the therapy formerly known as CTL019 only from patients that quickly respond to the treatment.
Gilead shareholders will want to keep an eye on Kymriah's launch for hints about future pricing trends among cell-based cancer therapies. While outcome-based reimbursement plans make sense in principle, they haven't received much traction in practice.
3. Not a one-and-done acquisition
Gilead isn't buying Kite Pharma just for the drugs it's developing. According to CEO John Milligan, Kite will become Gilead's cell therapy unit. Luckily, Gilead's finances are robust enough that bringing the young biotech into the fold probably won't overstretch it's research and development budget.
Gilead also found Kite's manufacturing operations particularly attractive. The little biotech recently opened a plant near the Los Angeles airport that boasts a 17-day turnaround from the moment a patient's cells are harvested until they're back at the treatment center to be reinfused. Given that the start-up was able to tighten its turnaround time to several days faster than Novartis', there's a good chance it can remain competitive after it gains access to Gilead's massive resources.
Putting it together
Although the eventual integration of Kite Pharma's operations into Gilead's will probably look very different from the company's previous acquisitions, it is brimming with long-term potential. Global spending on cancer medicines is expected to surge from $107 billion in 2015 to around $150 billion in 2020.
If Gilead can secure reimbursement for axi-cel with terms similar to those proposed by Novartis for Kymriah, the candidate under review could generate nearly enough sales on its own to justify the $11.9 billion acquisition, but there could be much more. If the company's predictions about the role cell-based cancer therapies will play in the future turn out to be accurate, this could be one of the most important deals in the company's 30-year history.