When Gilead Sciences (Nasdaq: GILD) purchased Arresto Biosciences late last year, I wondered whether the HIV specialist was inching into the cancer market. Today, with the purchase of privately-held Calistoga Pharmaceuticals, the company dove straight in.

Let's just hope it doesn't crack its head open on the bottom of the diversification pool.

Calistoga offers Gilead one compound, CAL-101, that's in phase-2 trials for a couple of different cancers and a pipeline of preclinical compounds that might be worth something down the line. Gilead is paying $375 million upfront, and it's on the hook for up to an additional $225 million if milestones are met. The deal seems reasonable on the surface, and Gilead can certainly afford it; at the end of last year, the company had $5.3 billion in the coffers.

But just because it's a decent deal doesn't mean Gilead should be jumping into the cancer realm. Does it really want to be competing with Celgene (Nasdaq: CELG), Amgen (Nasdaq: AMGN), Onyx Pharmaceuticals (Nasdaq: ONXX), and the other companies with more experience in that arena?

Gilead tried this once before. A decade ago, it licensed a bunch of cancer drugs but eventually sold the entire division to OSI Pharmaceuticals.

Admittedly, the company needs to diversify if it wants to grow; its top three drugs made up nearly 80% of revenue last year. Once the patents expire, sales will come crashing down, and the up-and-coming HIV drugs in its pipeline will have a difficult time competing against cheap generics. But I'm not initially convinced that cancer drugs are the way to go.

Admittedly, I don't have any better suggestions for Gilead to diversify into; branching out into heart drugs hasn't exactly been the best move.

Maybe Gilead would be best off sticking with other infectious diseases -- the company has a fairly strong hepatitis C pipeline -- and returning the free cash to shareholders in the form of a dividend. Sure, it's not as sexy and the cash flow will dry up when the HIV drugs start declining, but it might be more beneficial to shareholders in the long run.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.