Gilead Sciences’ Oncology M&A Strategy Explained

Gilead Sciences (GILD -0.21%) has wanted to be a leader in cancer treatment for awhile, and this week, it made a big splash into the indication when it announced the planned acquisition of Kite Pharma (NASDAQ: KITE), a company developing a new platform for cancer treatment called CAR-T.

In this clip from the Motley Fool's Industry Focus: Healthcare podcast, analyst Michael Douglass is joined by Todd Campbell to discuss Gilead's oncology merger and acquisition (M&A) strategy. Watch the video below to find out if these industry watchers give this deal a "thumbs up."

A full transcript follows the video.

This video was recorded on Aug. 30, 2017.

Michael Douglass: Let's turn back to Gilead's overall M&A strategy. This is really the first big, splashy deal they've done since the Pharmasset acquisition they did in 2011 -- which was for a similar price point, by the way, it was $11 billion, and this deal is $11.9.

Todd Campbell: Yeah, they had good luck with it that time around. Maybe they were like, hey, $11 billion, that's a good price, let's buy that. What's interesting, Michael, this is an even more advanced drug than that one, right?

Douglass: Yes, it's completed phase 3, whereas Sofosbuvir, which was the cornerstone molecule for hepatitis C that Gilead acquired when it bought Pharmasset, was only entering phase 3.

Campbell: Yeah. And Gilead has a history of always wanting to be the dominant player in a particular indication. They've done it in HIV, where they have 80% market share. They've done it in hepatitis C, where they have 90% market share thanks to that acquisition of Pharmasset back in 2011, or whenever the heck it was. Now, with Kite, they're hoping again to have a platform that's going to allow them to dominate in an indication, and boy is it a huge indication. Oncology drug sales exceeded $100 billion globally -- $100 billion!

Douglass: Yeah. For for me, it's not likely that Gilead is going to become the dominant cancer player, or anything like that. But, it's very clear that Gilead thinks that cellular therapy, this CAR-T that we've been talking about, is really one of the big futures, if not the big future, and that they view this platform just like Sofosbuvir was with Pharmasset and hepatitis C, their cornerstone for cancer. I'll actually quote from CEO John Milligan, who said in cancer, I quote, "Cellular therapy is going to be really the cornerstone of what we're doing going forward." And that's interesting, because Gilead has been signaling for a while that they wanted to get involved in cancer. They've made some attempts at cancer drugs in the past, some of which haven't panned out that well -- Zydelig being the big example.

Campbell: I'll go on record saying that was a flop. [laughs] 

Douglass: Yep.

Campbell: $35 million in sales last quarter. $120 million, some companies would like that, but for Gilead, that's a rounding error.

Douglass: Right, and that was their attempt to usher in a drug for chronic lymphocytic leukemia, and it just did not do well, and that was because of a nasty side-effect profile. So, this is really their opportunity, hopefully, to build the cornerstone of a platform that can really help launch them in a big way into cancer. 

Campbell: Michael, I suppose we should probably throw some caveats in here. We're excited about this deal because we know that Kite, being with both its CAR-T platform and it also has another platform that may allow it to target solid tumor cancers, which, wow, if you can develop a new platform for attacking a disease like non small-cell lung cancer, then you're talking billions and billions of dollars of sales opportunity there. At the same time, cancer drug development is incredibly hard, and there's significant risks. And we've seen already with Juno Therapeutics that these trials can get derailed quite quickly. We have patient deaths because of brain swelling in the Juno trials that caused it to get halted, and that still has the same target mechanism of action as Novartis' and Kite's drugs. You've got the risk of trial failure, you've got the risk of death as this rolls out to more patients, what side effects may pop up, we don't know. Then, you've got the trials that are probably going on, will those succeed or end up getting sidelined? So, there are some risks, here. And hopefully, hopefully for patients and investors, five years from now, we'll be looking back on this and saying, "Wow, what a phenomenal buy that was!"

Douglass: Sure. With that in mind, let's talk about what we actually think of the deal here now. Basically, do we like it as Gilead shareholders? Are we pleased, are we thrilled, are we scared, is this terrible? I'll go ahead and lead off because I'm posing the question, so it's only fair that I should eat my own cooking, here. I like the deal. I like it a lot. I do think it's a fairly expensive deal, but frankly, every time Gilead has done an acquisition, someone, a lot of people, have ended up accusing them of overpaying. And yet, it never has, it seems, just about. So, I'm a big fan of this deal. I think this gives them the platform that they need to make that longer put into CAR-T. This isn't about one drug. This is about a platform, this is about building a cornerstone set of therapies that can really enable them to carve out a big, dominant area in some of these really difficult-to-treat cancers. And, for me, I think it's going to do great things for shareholders, and I think it's going to do great things for the treatment of cancer. And, personally, that, for me, is the win-win.

Campbell: You know, Michael, I think a lot of the success or failure of this deal and whether or not I like it is going to be determined by how quickly do oncologists approach this for this tough-to-treat population? About 50% of Non-Hodgkin's patients can be cured by existing therapies. You're talking about a relatively small patient population out the gate of a few thousand people. A lot of it is going to [depend] on how it's priced. Some people say this could cost, what, $600,000?

Douglass: Which is, the price thing is actually a little bit frustrating, because Novartis is supposed to announce prices later today for Kymriah, and we just don't know right now at filming what they're going to do. Will Gilead price a little bit below that, a little bit above that, the same? We don't know, but that will at least give us a ballpark.

Campbell: Right, and how will payers view that, and when you go overseas, how will countries like England that NICE uses its metrics to try to figure out what the cost should be for medicines, how that will all shake out. There are some question marks, here, but overall, I think you summarized it very nicely. This gives them a platform that they can use to build an oncology franchise, and that's way more important than going out and buying one single drug as one company. And I think that's very important. And, you know what, yeah, it was expensive at $11.9 billion, but it's not like this is breaking the bank. The company still has $24 billion, and cash grew by $2.5 billion last quarter alone. So, there's plenty of money still kicking around to do other deals. So, I think this is a risky deal, but I think the reward justifies it, and I think it has a really good chance to be long-term positive for investors.

Douglass: The other thing that I'll throw out there is, Gilead's management has made clear that this isn't necessarily their only deal in oncology, that they are willing to buy up additional drugs, potentially other companies, who knows. But, they're willing to invest both in external M&A and also in internal R&D to make sure that they retain leadership in this area. And if that means they have to buy other companies, they've signaled that they're basically willing to do that, to make sure that Kite as Gilead retains its leadership in cancer. So, that's a very good sign for future M&A for Gilead shareholders. I think, as shareholders, we can be confident that a lot of that cash is going to get used in the future for maintaining that leadership. And in a lot of ways, that makes sense. More better treatments, new generations of drugs that can really help uncloak cancer and really strengthen the body's defenses are a win-win, both for shareholders and humanity.