Gilead Sciences (NASDAQ:GILD) is up about 12% over the last week or so since Novartis (NYSE:NVS) got its chimeric antigen receptor T-cell (CAR-T) therapy Kymriah approved by the FDA.

That's just ridiculous for a couple of reasons:

  • The approval of Kymriah was widely expected. Sure if Kymriah's approval was in doubt, the FDA signing off on the marketing application would bode well for Gilead, which announced two days earlier that it was buying fellow CAR-T drugmaker Kite Pharma (NASDAQ: KITE). But the FDA advisory committee unanimously recommended approving the drug, making an approval all but a slam-dunk. Novartis ended the day that Kymriah was approved down 1%, exemplifying the obviousness of the approval.
  • Kymriah and Kite's axicabtagene ciloleucel are on a collision course. Kymriah was approved for children and young adults with B-cell precursor acute lymphoblastic leukemia, which won't initially compete with axicabtagene ciloleucel that the FDA is reviewing for non-Hodgkin lymphoma that includes diffuse large B-cell lymphoma (DLBCL), transformed follicular lymphoma and primary mediastinal B-cell lymphoma. But Novartis has tested Kymriah in DLBCL with promising results, so the two drugs will likely end up competing for the same patients sooner rather than later.

The best-case scenario for Gilead wasn't an FDA approval of Kymriah, but a rejection based on some reason other than the fact that it was a CAR-T therapy.

Drawing of a cell

Image source: Getty Images.

Delayed reaction?

While it's hard to argue that Kymriah getting approved is good news for Gilead, it seems likely that some investors took the approval as a sign that Gilead is making the right decision buying Kite in the first place. Investors have been itching for Gilead to make some sort of deal, but shares were only up 1.2% last Monday after the deal for Kite was announced.

Some of the lack of enthusiasm comes from the price Gilead paid for Kite relative to the potential income from Kite's drugs in the short term; management noted that the acquisition won't start adding to earnings until four years after the acquisition. While that may seem like a long time considering Kite should have an approved drug at about the time the deal closes, it's only a little longer of a payoff than Gilead's acquisition of Pharmasset, which was announced in late 2011 but didn't start paying off until Sovaldi was approved in late 2013.

What investors should really be concerned about

Rather than being worried about whether the FDA will approve axicabtagene ciloleucel because it's a CAR-T, investors should be more concerned about the manufacturing of the treatment, which is specific for each individual patient.

Novartis has obviously convinced the FDA that it can manufacture the personalized medicine on a commercial scale, but that doesn't necessarily mean Kite will be able to do the same. Gilead has more manufacturing experience than Kite, but that's not very helpful in this case since Gilead's drugs are primarily small molecules that are manufactured through chemical synthesis, which is quite a bit different than handling human immune cells, the basis of CAR-T therapies.

Keep in mind, there's no evidence that there are manufacturing issues at Kite; it's just that manufacturing is a black box for investors. We get to see clinical trial data, so it's easy to estimate whether the FDA will pass the drug based on efficacy and safety. But the FDA won't grant an approval if the manufacturing isn't up to snuff, and there's just no way for investors to know if the FDA might find an issue there.

The good news for investors is that Gilead had presumably done its own due diligence on the manufacturing side, so hopefully there isn't a problem, but it's something investors should be aware of.

A good deal?

Overall, the acquisition of Kite looks like a good deal. Entering a new treatment space is risky -- just ask fellow CAR-T drugmaker Juno Therapeutics, which has had some side-effect problems resulting in the company shelving its lead drug -- but taking on that risk could result in substantial rewards as the therapies have the potential to cure people.

Adding Kite may not be as immediately transformative as the acquisition of Pharmasset because Gilead doesn't have the same kind of lead that adding Pharmasset gave Gilead in the hepatitis C space, but there's certainly room for multiple CAR-T drugmakers given the large number of blood cancers that Kite is developing additional CAR-T therapies for. And there's the potential for the immunotherapies to treat solid tumors eventually opening up even more potential patients.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.