Talk about having cash burning a hole in your pocket. Gilead Sciences (NASDAQ:GILD) spent $125 million of the $6.2 billion it had in the bank at the end of the third quarter to buy a priority review voucher from Canada's Knight Therapeutics.

The voucher is given to companies after they gain Food and Drug Administration approval for drugs that treat neglected tropical diseases and gives the owner the ability to turn a standard review, which currently takes the FDA 12 months to complete into a priority review, which takes eight months.

The voucher can be sold, as Knight has done, or be used for another drug the company is developing. Either way, the program adds a financial incentive for companies to develop drugs for neglected tropical diseases.

Credit: Dafne Cholet via Flickr

The catch: To use the voucher, the owner has to give the FDA at least a 365-day warning that it plans to use the voucher for a future marketing application.

The $125 million price tag looks mighty expensive considering that Regeneron Pharmaceuticals (NASDAQ:REGN) and Sanofi (NASDAQ:SNY) bought BioMarin Pharmaceuticals' (NASDAQ:BMRN) priority voucher for just $67.6 million a few months ago. BioMarin acquired that voucher under a different program for rare pediatric diseases, and the voucher only requires the owner to give the FDA a 90-day warning, so it's more useful and should therefore be worth more not less.

At least, at this point. There's actually legislation in Congress that could reduce the FDA leeway requirement for tropical disease vouchers to just 90 days and allow the vouchers to be sold more than once.

We don't know what the auction process for the two vouchers was like, but it appears that Gilead should have outbid Regeneron and Sanofi, potentially getting BioMarin's voucher for less than $125 million. According to my calculations though, it looks more like Regeneron and Sanofi got a deal on their voucher than Gilead overpaid for its.

The value of a voucher can be broken down into three parts:

  • Companies get the revenue gained from sales four months earlier.
  • The voucher gives four additional months of sales under patent.
  • The drug gets on the market earlier, which could help with competition.

Getting revenue four months early shouldn't contribute much extra value except under rare situations where a drug is an instant blockbuster. And those drugs usually garner priority reviews on their own because they offer "significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions when compared to standard applications" according to the FDA.

The extra four months of patent life is actually quite valuable if peak sales are high enough. The potential to get to market early, allowing the companies to compete with other drugs for patients, is hard to quantify, but it's certainly an added bonus that can justify purchasing a priority voucher.

Regeneron and Sanofi plan to use their voucher for their cholesterol drug alirocumab, which will be submitted to the FDA shortly. The drug will face competition from Amgen's (NASDAQ:AMGN) evolocumab, which is in the same class, inhibiting a protein called PCSK9. Amgen has already submitted its application to the FDA, but Regeneron and Sanofi could jump ahead of Amgen's Aug. 27, 2015, FDA action date if the companies submit their application and voucher before the end of December.

We could speculate what drug Gilead might use its priority voucher on, but it probably isn't worth the effort. There's a good chance that Gilead didn't buy the voucher with any drug in mind but will use it strategically in the future on a drug where the benefits justify the cost. The voucher could even end up being used on a drug Gilead has yet to gain rights to through an acquisition or license.

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