Biotech investing is generally cyclic in nature. The interplay between innovation and patent expirations makes many of these companies prone to enormous swings in revenue every couple of years. To smooth out the edges, biotechs must continually restock the cupboard through a mix of organic pipeline development and business development activities, such as external licensing deals or acquisitions.
Unfortunately, the vast majority of clinical-stage assets fail to evolve into commercial-stage products. So, despite management's best efforts to offset the eventual decline of top-selling medicines through aggressive clinical or business development activities, prolonged lean periods are still commonplace throughout the biotech industry.
American biotech giant Gilead Sciences (NASDAQ:GILD) encapsulates this narrative almost to a T. During the company's formative years, it built a market-leading HIV franchise, which provided the capital necessary to take on larger acquisitions. In 2011, for instance, the biotech purchased Pharmasset for approximately $11 billion. This seminal transaction would form the backbone of Gilead's game-changing hepatitis C franchise. At its peak, Gilead's hep-C drug sales hit a whopping $19.1 billion in 2015.
A boom followed by a bust and a managerial shake-up
However, the hepatitis C drug market quickly fell apart because these new therapies effectively cured patients. The bad news is that Gilead has never been able to replace the bulk of the lost hep-C revenue because of a string of clinical failures across its pipeline, poor execution on the business development front, and the underwhelming commercial performance of its fledgling cancer franchise. So with Gilead losing a staggering $100 billion in market capitalization from 2015 to 2018 (see the following chart), the biotech decided that a shake-up in the C-suite was necessary. Former Roche executive Daniel O'Day replaced John Milligan as chief executive officer of the biotech in March 2019.
Five months later, O'Day's vision for the company would start to become clear. Eschewing pricey acquisitions, Gilead instead decided to deepen its relationship with Belgian biotech Galapagos (NASDAQ:GLPG) through a $5 billion collaboration agreement. This deal gave Gilead access to more than 20 preclinical programs, and six compounds already in clinical development. Chief among them, Gilead gained more control over the megablockbuster-in-waiting filgotinib, an experimental medication that's widely expected to become a big seller as a treatment for rheumatoid arthritis and other inflammatory diseases. Filgotinib is the undisputed centerpiece of Gilead's long-term value proposition.
Where will Gilead be 10 years from now?
Gilead is at a critical juncture in its life cycle. The biotech's core plan seems to be to return to growth on the back of filgotinib's stellar commercial potential and then use its $25.8 billion in cash to flesh out other areas of need in its pipeline. Most likely, Gilead will buy a few oncology companies to bulk up this less-than-stellar franchise and perhaps dive deeper in the non-alcoholic steatohepatitis (NASH) space with an acquisition or two as well. So if things go according to plan, we're looking at a large-cap biotech that could be generating high-single-digit top-line growth during the period covering 2024 to 2030.
The big problem is that Gilead really hasn't had much luck outside infectious diseases. Its $12 billion Kite Pharma acquisition has turned into a boondoggle, its NASH assets have repeatedly flamed out in clinical studies, and its rather questionable strategy of sitting on a mountain of cash -- while key competitiors rapidly gobbled up the most promising bolt-on biopharmas -- hasn't played out well in the least.
Driving this point home, Gilead has missed out on acquisition targets such as Array BioPharma, Celgene, Medivation, Pharmacyclics, Otezla, and Tesaro, among many others, since 2015. Most of these former acquisition targets would have made a positive impact on the biotech's near- and long-term outlook.
Therefore, the idea that Gilead is suddenly going to turn the corner by attempting to go after AbbVie's (NYSE:ABBV) bread-and-butter franchise of anti-inflammatory drugs with filgotinib is a questionable investing thesis, to put it mildly. AbbVie, after all, returned filgotinib's commercial rights to Galapagos back in 2015 to focus on the development of Rinvoq, a drug that has already hit the market and is off to a blazing start.
So if past is indeed prologue, Gilead seems more likely to continue to flounder and slowly lose even more value over the next 10 years, the inevitable outcome of which seems to be that Johnson & Johnson, Pfizer, or maybe even AbbVie will acquire Gilead in the latter half of the decade.
On the flip side, Gilead does have an enormous amount of financial flexibility to throw at M&A, which could radically alter its trajectory in the blink of an eye. But that's been the case for the better part of the past five years, and nothing has really changed in that time. The bottom line is that more of the same from Gilead is unlikely to move the needle from a value creation standpoint over the course of the 2020s.