What's Driving Gilead Sciences' Growth-Through-Acquisition Strategy

This hasn't been the biggest year for mergers and acquisitions in the biopharmaceutical space, but an inability to meet with colleagues in real life hasn't stopped Gilead Sciences (GILD 0.32%) from making multibillion-dollar deals with cancer drug developers.

The company followed up a $4.9 billion deal to acquire Forty-Seven in March with a $21 billion agreement to acquire Immunomedics (IMMU). In this Fool Live video, Healthcare and Cannabis Bureau Chief Corinne Cardina and longtime Motley Fool contributor Cory Renauer discuss the motivations behind Gilead Sciences' recent acquisitions.

Corinne Cardina: So it hasn't been the biggest year for healthcare mergers and acquisition, but there have been some very exciting developments. So there are three that I want to talk about today. The first one is, of course, Gilead Sciences. So this company has been in the news ever since the pandemic began and remdesivir became a notable treatment for COVID-19 patients. But there's a lot more to this company than its COVID-19 treatment. So Gilead's strategy for a long time, even before its current CEO, Daniel O'Day came on in 2019, it's been acquisitions. Growth through acquisitions. So they acquired Kite Pharma, a cancer immunotherapy in 2017 for about $12 billion. Immuno-oncology and immunotherapy, that's something we're going to talk a little bit more about. Cory, what does that mean?

Cory Renauer: So in a nutshell, immuno-oncology means using the immune system to fight cancer. Now, this is a really big deal because all of us, we're always getting cancer all the time but the diseases we think about as cancer is something that leads to a diagnosis from a physician. That's what happens when immune systems are somehow prevented from attacking tiny tumors before they become troublesome, in a nutshell.

Corinne Cardina: Very interesting. So that's been pretty important for Gilead's strategy. They've really been building on their cancer treatment business. So it started with Kite Pharma in 2017. This May, they bought Forty Seven, a clinical stage immuno-oncology company for almost five billion dollars, and the most recent one is Immunomedics, that was announced in September. They're paying $21 billion for it. It's supposed to close in the fourth quarter, so probably soon. What does Immunomedics add to Gilead that they don't already have?

Cory Renauer: They add a crucial stage drug called Trodelvy, if I'm pronouncing that right. Have you heard it pronounced yet?

Corinne Cardina: No, I haven't, as lot of times these drug names, I'm just guessing.

Cory Renauer: I am worse. I have never been close when I finally hear it. Anyways, I'm going to go with Trodelvy, T-R-O-D-E-L-V-Y. This is a drug that you might be surprised to learn by the company's name, isn't actually an immunotherapy. It's an anti-body drug conjugate that targets TROP-2. This is a protein, commonly found on the surface of tumor cells. It's a great target, as it turns out, for this drug Trodelvy , which one side is an anti-body of proteins that will recognize TROP-2, and then it drops off a small dose of chemotherapy that doesn't become active until it enters the cell that it's trying to kill, which should be only tumor cells. Anti-body drug conjugates had been on the market for quite a while, they have done well. This is the first time one has been approved for triple-negative breast cancer, that's breast cancer that doesn't react to the three most common targets used to treat breast cancer. Now they're financing this years on in shopping spree with a great deal of debt. Do you want to chime in here, Corrine?

Corinne Cardina: Yeah. This isn't even its most recent pricey acquisition, but this has been the company's strategy for a little while. It seems like they're financing with a combination of debt and cash and so it'll be something for investors to keep an eye on. How is their debt increasing? Is their current operations creating enough cash flow to keep them on the good side of their debt? Just some questions about that growth through acquisition strategy from the financing side of things will be important for investors to keep an eye on. Cory, can you tell us anything more about Gilead's core business, is it pursuing this kind of growth strategy? Because it's own R&D isn't coming up with quite enough or is immunotherapy just so hard that it makes more sense to acquire companies that have really already found the proof-of-concept.

Cory Renauer: Gilead's R&D strategy hasn't been terribly productive in recent years. That's putting it lightly. Although they have done extremely well with their HIV drugs, Biktarvy and the other ones. This will add some revenue right away. It's hard to say if it is going to be enough to make up $21 billion worth of one of the company.

Corinne Cardina: Yeah, absolutely. They have a whole suite of HIV treatments and prophylactics, so preventative medicines for HIV and that has really been a big driver for Gilead. They have remdesivir, but I think they've donated a large amount of those doses so questions about how much that's really helping them financially. Before we move onto the next stock, what do you think of Gilead Sciences as an investment? Do you think it's a good buy? Do you think it will outperform the S&P 500? Any thoughts more broadly?

Cory Renauer: There isn't a lot of room for error for Gilead right now. As a stock, it's trading at a very low multiple, I think the dividend offers a yield over four percent right now. With HIV revenue coming in pretty steadily, you can probably depend on that, now that filgotinib, the company's rheumatoid arthritis drug that was licensed from Galapagos, now that that's fallen through, or at least the FDA approval, they've received a complete response letter, so that's been delayed for a long time. It's nervy. I think you might be able to find better pharmaceutical stocks out there right now than Gilead Sciences.